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What the interest rate rise could mean for business and the high street

Published: 2 November 2017 - Fiona Garcia
 

The British Retail Consortium (BRC) believes the rate increase - the first since July 2007 – of up to 0.5%, means the Chancellor needs to deliver a new budget for shoppers.

BRC head of retail insight & analytics Rachel Lund said today: “While the increase in interest rates is a small and highly-anticipated change, this is the opening move in a new phase of economic management, one in which monetary policy shoulders less of the burden of supporting growth, leaving fiscal policy and the Government to raise its game.”

Retailers will, of course, fear that more expensive mortgage repayments and other higher bills will leave consumers feeling the pinch and mean they have less to spend.

Ms Lund explains: “Higher rates in the current environment leave the Chancellor some significant risks to prepare for, particularly as far as consumers are concerned. Consumer spending has slowed sharply in the last year, as inflation - fuelled by the currency depreciation - has accelerated. At the same time, wage growth has remained frustratingly weak and consumers have compensated by borrowing, with consumer credit returning to pre-crisis levels.

“Higher interest rates will only serve to curb borrowing, squeeze household finances - particularly for the less well off, and reduce spending. They will do nothing to increase wage growth. So, in an already-challenging environment, without action from the Chancellor in his budget this month, the risks of a further slowdown in consumer spending have become very real.”

 

Consumer confidence

GFK’s long-running Consumer Confidence Index slipped by one point to -10 in October. Both measures for the General Economic Situation decreased, while the measure for Personal Financial Situation over the last 12 months and the Major Purchase Index increased. The score for Personal Financial situation over the next 12 months saw no change.

GFK head of market dynamics Joe Staton was not surprised that the overall index score continued “to bump along in negative territory” last month, as concerns about the wider economic prospects for the UK economy dampen the nation’s outlook, meaning “consumers are showing no real ‘get-up-and-go’,” he explained.

However, with borrowers set to be hit the hardest by an uplift in interest rates and, conversely, savers set to reap the benefits, it will be interesting to see how today’s new impacts spending over the coming months and all-important Christmas period.

Mr Staton added: “Our enthusiasm for spending, as witnessed by the uptick in the Major Purchase Index, is more worrying than reassuring. Surging credit card use is fuelling spending at the expense of our appetite for saving, which is growing at the slowest rate since the start of the 2008/2009 financial crisis. We are now entering the crucial Christmas trading season and it will be a testing time for retailers and consumers alike. Will consumers carry-on shopping or start to cut back in the face of mounting pressure on our pockets?”

 

Small businesses

Meanwhile, the Forum of Private Business (FPB) has raised its own concerns about the impact today’s base rate rise will have on the business community.

FPB chief executive Ian Cass said: “While the small increase may not impact businesses hugely, it will make them think again about their spending commitments. At a time when the business community is already being cautious, this rise may lead many to hang onto their cash to ease difficult cash flow issues.
“Additionally, late payment issues will have a greater impact than previously and they will think even harder before lending money to invest in growth.”

Meanwhile, for anyone worried about further interest rate rises, experts think it unlikely that we will see a further series of increases next year. The reason behind this thinking is primarily because, with the Bank of England forecasting that inflation will fall back below 3%, it will be mindful that any rate increases could strangle weak growth in an economy already hampered by fear and uncertainty over Brexit.

 

 

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