The Bank of England is keeping a close watch on consumer spending amid signs households are dipping into their savings and amassing debts to keep spending in the face of rising inflation.
Mark Carney, the Bank governor, said consumer spending had held up since last summer’s vote to leave the EU but he reiterated a warning that living costs were likely to rise on the back of a weak pound and squeeze households’ real incomes.
In a speech setting out the tradeoff the Bank faces between keeping inflation in check and supporting growth and jobs, Carney noted signs that consumers continued to power the UK economy.
“At present, households appear to be entirely looking through Brexit-related uncertainties. The saving rate has fallen towards its pre-crisis lows, and consumer borrowing has accelerated notably,” Carney said in a speech to the London School of Economics on Monday.
But he reiterated the Bank’s fears that this important driver of growth was under threat this year as the pound’s fall since the EU referendum pushes up the cost of imports and that is passed onto consumers as higher prices.
Carney pointed to lessons from recent history that such growth tended to be both “slower and less durable”.
“This is because consumption growth eventually outpaces earnings growth, increasing debt and making demand more sensitive to changes in employment and income,” he said.
Speaking a day before official figures are expected to show that inflation reached a two-year high in December, Carney noted the Bank’s forecast made in November for higher inflation to weigh on people’s real incomes, slowing consumption growth. He said that how household spending evolves would be an important consideration for policymakers at the Bank over the next year as they weigh up how to set interest rates.
His comments about household borrowing come after the latest figures from the Bank showed that unsecured consumer credit, which includes credit cards, car loans and second mortgages, grew at its fastest rate in more than 11 years.
Debt charities said the signs of a credit boom that is close to levels not seen since the 2008 financial crash should set alarm bells ringing in Theresa May’s government.
Carney did not elaborate on the rise in household borrowing but said the monetary policy committee would continue to monitor the situation.
In his speech, he also defended again the Bank’s decision to cut interest rates to a record low of 0.25% in August to shore up confidence and limit job losses in the wake of the EU referendum in June. The Bank chose to risk allowing inflation to overshoot its 2% target in order to limit the effects to unemployment, he said. Not acting then would have cost an extra quarter of a million jobs, Carney said.
“Fully offsetting the persistent effects of sterling’s depreciation on inflation would have required exerting further downward pressure on domestic costs. And that would have meant even more lost output and a total disregard for higher unemployment,” he said.
Carney did not give a hint of whether interest rates were headed up or down next. Instead he repeated his recent mantra: “Monetary policy can respond, in either direction, to changes to the economic outlook as they unfold to ensure a sustainable return of inflation to the 2% target.”
Before May’s key speech on the Brexit process on Tuesday, Carney sought to strike an upbeat tone concerning the UK’s longer-term prospects outside the EU. “The flexibility and dynamism of this economy will help it adjust as its relationship with the EU becomes clearer and new opportunities with the rest of the world open up,” he said.
