It was Gordon Brown’s coronation yesterday. And not a moment too soon.
The new Prime Minister is now ex-chancellor, just as the signs that interest rate hikes are starting to seriously squeeze the UK consumer are arriving thick and fast.
The Confederation of British Industry reported that its latest retail sales survey had shown a sharp fall in sales, to the lowest level since November. “This survey shows consumers are reining in their spending in response to higher borrowing costs,” said the CBI’s John Longworth.
The week before, both Tesco and Sainsbury’s issued lukewarm trading updates. We’ve also seen downbeat news from car dealer Pendragon and carpet chain Carpetright.
We bet Mr Brown’s successor can’t wait to take his place at The Treasury…
It’s not just the consumer that’s being squeezed by rising interest rates. Mortgage bank Northern Rock’s share price fell by 12% yesterday as it warned profits would come in below forecasts. As the FT reports: “the bank failed to anticipate rising interest rates” which have driven up its costs for funding mortgages.
The warning was due to the way the bank funds its lending, rather than any weakness on the consumer side, but if lenders feel the pain in their profit margins, then they’ll just make it more costly for homebuyers and remortgagers to take out new loans. It’s already becoming harder to get a decent fixed rate without having to pay stratospheric arrangement fees (Merryn’s got more on this in the latest issue of MoneyWeek, out tomorrow). The fear spread to other banks in the sector, with rivals such as HBOS and Bradford & Bingley also losing ground.
We’ve seen a slowdown like this before, back in 2004/5, when rising interest rates were starting to make an impact on consumer spending. If the Bank of England had stayed the course then, reining in the consumer borrowing spree, we might have seen a soft landing - or rather, a less hard landing than we’re likely to see now.
Will the Bank maintain the course this time? Certainly, it won’t give up without a fight, if deputy governor Sir John Gieve has anything to do with it. Earlier this week, he explained his reasons behind voting to raise rates at the last meeting of the Monetary Policy Committee (at which the vote was 5-4 to hold rates).
Unsurprisingly, he’s worried that the current rate of credit growth is unsustainable. But he also argued that the Bank is in danger of having its inflation-fighting credentials questioned. “I felt that the impact of moving too slowly on the credibility of the regime and thus the future prospects for the economy was of greater concern.” He agreed there was a risk that rates might rise too fast, but also warned that “we may raise rates too slowly with a cost in higher inflation and potentially higher interest rates and a sharper slowdown in the end.”
But it’s not just the UK that’s feeling the credit squeeze. Ominous signs are piling up for the global economy as a whole. We’ll look at these in more detail in tomorrow’s Money Morning, but among the danger signs the FT points to are a 1% rise in the value of the yen over the past week (which could hammer carry traders - see yesterday’s Money Morning for more detail: Why does everyone hate the yen? (http://www.moneyweek.com/file/31362/why-does-everyone-hate-the-yen.html)), and growing difficulty for private equity and companies to raise funding through bond issues as investor risk aversion grows.
Source-Money Morning