Consumers under pressure ahead of potential Bank of England rate rise

Published by Edmund Greaves on 30 October 2017.
Last updated on 30 October 2017

Consumers under pressure ahead of potential Bank of England rate rise

More than half of consumers are cutting back spending and feel their wages are under significant pressure according to research from Lloyds Bank.

The findings come ahead of this week’s Monetary Policy Committee meeting, in which markets are increasingly expecting the Bank of England to attempt to cool rising inflation with an interest rate rise.

According to the Lloyds Bank survey more than half (51%) of UK consumers are currently under pressure to reduce their spending. The report found that women and families feel particularly under strain at the moment, with a heady mixture of rising inflation and sluggish wage growth to blame.

Those who describe their financial situation as “tight” have cut back significantly on leisure (48%), socialising outside of the house (46%) and non-essential groceries (43%). It appears, however, that consumers are becoming less willing to sacrifice entertainment subscriptions or electronics purchases, with only one in four (25%) saying they would cut these in order to save money.

The bank has also found through its own customer data that year-on-year “essential spending” has grown 2%, a now 16-month trend. This reflects consumers’ adjustment of spending priorities away from non-essential spending.

Robin Bulloch, managing director of Lloyds Bank comments on the figures: “While the increase in consumers’ essential spending has been well documented in recent months, in times of rising inflation that only ever tells half the story. When paying more for everyday items like food and fuel, people are faced with tricky decisions on where to cut back in other areas.

“It’s also notable that far from being a consistent picture, women and families seem to be feeling the strain more than most. However, they are also the savvier spenders, taking more time to seek out the best deals and offers.”

Bank of England rate decision due

With inflation reaching 3% in September, it is possible that the Bank of England will take more aggressive action to cool the economy by raising rates to 0.5%. Indeed, the governor Mark Carney hinted as much at the end of September.

However, Laith Khalaf, senior analyst at Hargreaves Lansdown says a rate rise is by no means a certainty.

“The market looks to have got ahead of itself by treating a rate hike on Thursday as a done deal -  little has changed in the economic data since the last decision, when seven out of nine members of the committee voted to keep rates on hold.”

He adds: “We wouldn’t be too shocked to see rates held at 0.25% on Thursday, though the bank does need to put up or shut up soon. A failure to raise rates in the coming months would see Mark Carney rebranded from an unreliable boyfriend to a downright cad. It would also likely lead to a further depreciation of sterling against the dollar, which would prompt a further bout of imported inflation.”

What a rate increase means for your finances

Frustrated savers will welcome any increase to interest rates, however small, who can look forward to better savings rates and possible price wars as banks strive to win more customers.

In fact, some savings providers are already uplifting rates. Virgin Money was the first provider to break cover in October offering market-beating rates. Last week little-known Ikano Bank refreshed their rates to much more competitive levels too.

Borrowers on the other hand will see their costs go up if interest rates rise.

Moneywise reported last week that a base rate rise would cause to an average increase of £198 in mortgage costs. Those with credit cards and other debt are also likely to be affected.

Yet Mr Khalaf says it’s important not to over emphasise the impact of a small increase.

 “If we do get an interest rate rise on Thursday it will be a symbolic moment, particularly seeing as around 8 million Britons haven’t seen a rate rise in their adult lives. However, it doesn’t materially change conditions for investors on the ground. Interest rates will still be incredibly low, with further rate rises taking place only very gradually. Borrowing costs for companies and individuals will therefore remain affordable, while cash will still be returning less than the rate of inflation.”

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Wages have been frozen, high

Wages have been frozen, high percentage of jobs on 'minimum wage, more difficult to get a job and when people can't afford things they just borrow more. How can any increase benefit the poorer relation?!

One teeny tiny 0.25% rate

One teeny tiny 0.25% rate rise will have next-to-no effect on borrowers or savers. Borrowers will still enjoy historically-low rates for getting into debt and savers will still suffer real-terms-negative rates on their hard-earned carefully-conserved savings. Meaningful changes won't even begin to occur unless there is at least a whole 1% base rate increase with more in the pipeline. Thursday's rate announcement will be nothing but a disappointment. Mark Carney is the puppet of HM Treasury (like his predecessor who started the treasonous debasement of our currency, aka quantitative easing), which is desperate to keep down the cost of servicing the out-of-control national debt. we need a BoE governor with a spine and some honesty from government about the state of the national debt.