Rate hike caution necessary with looming consumer spending slowdown says Bank of England official

 
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Booming consumer sales have been a major contributor to UK growth (Source: Getty)

A slowdown in British consumer spending means the Bank of England must act cautiously in raising interest rates, according to an influential official.

Gertjan Vlieghe, a member of the Bank’s rate-setting Monetary Policy Committee (MPC) said: “A rate hike that turns out to be premature is a more serious mistake than one that turns out to be somewhat late. Caution is warranted.”

In a speech in London he said growth in consumer spending will likely slow down, putting the brakes on one of the main drivers of the UK’s strong economic performance in recent times.

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“I think the slowdown is more likely to intensify than fade away,” Vlieghe said.

The UK economy accelerated in the second half of 2016, largely due to consumer spending. Consumer-focused businesses such as retail were the dominant contributors to growth in the last quarter of 2016.

However, the Bank fears spending will fall as rising prices eat into real wages, while there have been some signs, such as retail figures, that growth may be slowing.

Vlieghe said: “My interpretation is that households are now responding to the change in real income growth.”

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The fall in the value of sterling since the EU referendum has raised input prices by 19.1 per cent year-on-year in February, while consumer price inflation has risen to 2.3 per cent, above the Bank’s two per cent target.

However, the Bank has said it is determined to ignore the rise in inflation so long as it is generated by the rising relative price of imports.

Vlieghe emphasised the MPC’s focus on “medium-term pressures” on inflation, and said the effects of sterling’s devaluation may take several years to pass through completely.

Wage growth, one of the key domestic inflationary pressures, has risen, but “not nearly as much as we had expected”, Vlieghe said.

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The 11-year low unemployment rate in the UK has not so far translated into upward wage pressure, Vlieghe said. He also pointed to structural factors that could be pushing down the equilibrium rate of unemployment, the rate at which wages will be pushed up.

He said: “Involuntary part-time and self-employed workers, the threat of future job losses due to automation, demographic changes, all work in the direction of leading to less upward wage pressure for a given level of unemployment.”

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