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Interest Rates Held Unchanged

The November meeting of the Monetary Policy Committee has seen interest rates held at 4.5 percent for the third consecutive month. This decision to leave the rates unchanged has once again come in for criticism from businesses, especially those in the retail sector who feel that the MPC should have acted more boldly and cut rates in order to help bolster the flagging consumer spending levels.

This view is opposed by the MPC, as Richard Lambert, one of it’s members said that the MPC “are not in business to rally shoppers back to the high street." The main aim, as stated before by the Bank’s governor Mervyn King, is to keep inflation as close to the two-percent target set by the Chancellor as possible.

The current slowdown in the economy is largely down to people’s unwillingness to increase their spending as much as they have over recent years, at present it looks as though the yearly growth in spending could be as low as 1.8 per cent – which would be the lowest level for a decade.

So is it purely the interest rates that are causing this economic slowdown? Well the fact is that they are a hugely influential factor, however they are not the sole reason behind the subdued growth in consumer spending. The squeeze on spending is partly down to increases in living costs cause by rising fuel prices and council tax increases, and while household income has risen, fiscal drag has meant some of this has not actually translated into disposable income.

It is thought that the effects of the quarter-point cut made in August will begin to filter through into real disposable income shortly, and that this could help the levels of spending on the high street to recover slightly, however it is unclear whether this will be borne out in reality. With surveys showing that people are intending to increase the proportion of their income that they put away in savings, it’s unlikely that we will see the strong growth in the economy that the past year has seen.

With the Christmas period almost upon us, the tills at the high street are preparing for what is traditionally the busiest period of the year, for many retailers this cannot come soon enough, and it will certainly provide a boost to the economy, albeit short-term.