Shoppers walk along Oxford Street in London, Britain, 26 May 2018. The UK has economy has reported its worst quarterly GDP figures since 2013, official figures have shown. Growth has fallen to just 0.1 per cent.UK economy worst quarterly GDP figures for five years, London, United Kingdom - 26 May 2018

Central bankers in the U.S. and Europe are working on their best interest-rate tightrope walk.

From the U.S. to Britain to the eurozone, the monetary masters are trying to wean consumers and businesses off the cheap-money policies that came out of the financial crisis and became the norm, while not risking fragile recoveries, particularly in Europe. It’s no easy feat, especially at a time when everything from trade wars to populist governments to productivity conundrums creep up on policymakers, threatening to push them off course.

Consumer spending is one key driver of growth that they’ll be monitoring like hawks as they assess the health of their various economies and what changes in interest rates they can withstand. Raising interest rates from the crisis-induced record lows will fend off inflation, but it will also push borrowing costs higher, meaning maintaining credit-card balances, student loans and many mortgages will be come more and more expensive.

Policymakers want to tread carefully and make sure consumers can withstand rate increases so they don’t curb spending at the tills and in turn derail any recovery.

Here, WWD looks at the balancing acts at three key central banks.

Jerome PowellFed Chair Jerome Powell Softens Volcker Rule, Washington, USA - 30 May 2018 Chair of the Board of Governors of the Federal Reserve Jerome Powell attends an open meeting after softening the 'Volcker Rule' at the Federal Reserve in Washington, DC, USA, 30 May 2018. According to the Federal Reserve, the Volcker Rule prohibited banking entities from engaging in proprietary trading and from generally owning or controlling hedge funds or private equity funds.

Jerome Powell, chairman of the U.S. Federal Reserve.  JIM LO SCALZO/EPA-EFE/REX/Shutterstock


After seven years of near-zero rates, Americans are having to adjust to a new world (or just to an old world depending on their age) of higher borrowing costs as the U.S. Federal Reserve, led by chairman Jerome Powell, powers ahead.

They’ve already seen seven — albeit small — increases since 2015 and will have to brace themselves for several more over the next couple of years, with the Fed expecting rates to hover around 3.4 percent in 2020.

So far, consumers appear to be taking the increases in stride, recently stepping up their spending after a relatively quiet start to the year, with nationwide retail sales ticking up 5.9 percent year-over-year in May.

One beneficiary of this uptick in spending was department store Macy’s Inc., which raised its full-year outlook last month after a better-than-expected first quarter, as shoppers bought more full-priced goods.

Chris Christopher, executive director at economic consultancy IHS Markit, said: “What basically happened is that America partied a little too heavily around the holiday season so they took it a bit easier — especially for the first two months of the year. They’re back on track now and things are looking pretty good.”

The reason they’re opening their wallets again? Recent tax cuts, wage growth and a better jobs market seems to be the general consensus among economists, who believe consumers should be able to withstand the succession of small rate rises planned by the Fed without curbing spending and hitting retailers.

“The impact of higher rates on consumers will be gradual and something they can withstand in the current environment,” according to Scott Hoyt, a senior director at Moody’s Analytics. “Consumers are in a good position financially. Their debt burdens remain very [manageable] by historic standards and they’ll be slow to rise with rising interest rates because right now consumers have relatively little adjustable rate debt.”

That’s not to say there aren’t risks on the horizon. Indeed, the U.S.’s escalating tit-for-tat trade war with China doesn’t look like it’s going to stop anytime soon with the daily one-upmanship game between President Trump and President Xi Jinping still going strong.

Trump’s latest plan is to slap tariffs on $200 billion worth of Chinese imports. And Trump has threatened to go further, with duties on another $200 billion in imports, if China continues to retaliate with trade restrictions of its own. Higher costs to bring goods across the border will eventually lead to higher prices for consumers.

For now, though, that is still just a risk and consumers appear ready to start spending more — a fact that will please retailers after a tough couple of years.

Mark CarneyBank of England release Financial Stability Report, London, United Kingdom - 27 Jun 2018 Bank of England Governor Mark Carney delivers the banks financial stability report at the Bank of England in London, Britain, 27 June 2018. According to the Bank of England in its financial stability report by the Financial Policy Committee, the (FPC) continues to judge that, apart from those related to Brexit, domestic risks remain standard overall. In recent months there has been some reduction in domestic risk appetite, although it remains strong.

Mark Carney, governor of the Bank of England.  WILL OLIVER/EPA-EFE/REX/Shutterstock


As the U.S. leads the way on interest rate increases, its British counterpart has remained much more cautious as it faces the looming Brexit, lifting rates just a touch, from 0.25 percent to 0.5 percent, last year.

Led by governor Mark Carney, the Bank of England’s concern is that modest growth has been driven by trade and business investment and not increased consumer spending amid months of bad weather, including the so-called “beast from the east,” limited wage rises and stretched household finances.

The numbers say everything: consumer spending only grew by 1.4 percent last year, less than half the 2.9 percent recorded in 2016 and the smallest increase since 2011, according to a recent analysis from the consultancy EY.

All this, combined with the rise of cheap online fashion retailers such as Boohoo, has battered the traditional British High Street as retailers struggle with onerous leases, resulting in multiple store closures and thousands of jobs lost.

Just last week department store chain Debenhams issued its third profit warning in six months, while its rival, House of Fraser, said it would have to close 31 stores, the equivalent of more than half of its portfolio, affecting 6,000 jobs.

And it’s not just high-street stalwarts that are struggling. Luxury British handbag maker Mulberry initially benefited after the shock Brexit announcement as tourists took advantage of the weak pound. That didn’t last, however, with Thierry Andretta, its chief executive officer, last week admitting that the U.K. “remained challenging.” Its U.K. sales fell 9 percent in the first quarter on the back of lower footfall and fewer tourists.

Better-than-usual summer weather will likely boost spending in the short term (evidence of that has already been seen in the sales data from May, which was helped by the royal wedding effect). But experts believe other issues won’t disappear so easily as Britons are not seeing the same pay raises they became accustomed to precrisis due to weak productivity.

Nevertheless, Bank of England policymakers indicated they could have a change of heart if they see enough of an improvement by later in the summer and markets have not ruled out an August rate rise.

“The case for an August interest-rate hike is not yet ‘done and dusted,’ and could yet be data-dependent. Recent U.K. economic news is far from 100 percent convincing on the economy’s improvement,” said Howard Archer, chief economic adviser to the EY Item Club, the accountancy firm’s U.K. think tank.

Mario DraghiEurogroup Finance Ministers meeting in Brussels, Belgium - 24 May 2018 European Central Bank (ECB) President Mario Draghi (R) waits for the start of an Eurogroup Finance Ministers' meeting at the European Council in Brussels, Belgium, 24 May 2018.

Mario Draghi, president of the European Central Bank.  STEPHANIE LECOCQ/EPA-EFE/REX/Shutterstock


If the Federal Reserve is in the fast lane, then the Frankfurt-based European Central Bank is stuck in the slow lane, with rates in the 19-strong eurozone static at negative 0.4 percent for more than two years, meaning that banks have to pay the ECB for holding money rather than receive interest.

While at one point negative interest rates were unthinkable, they have become the norm and this backdrop is unlikely to change anytime soon as higher oil prices and trade woes combined with concerns over the intentions of Italy’s new populist government leaves Mario Draghi and his cohorts at the European Central Bank with little choice but to hold steady on rates for the foreseeable future.

It’s already been confirmed that interest-rate increases are out for this year, with the ECB stating that it would wait “at least through the summer of 2019” before making any moves — “at least” being the operative phrase.

Negative interest rates may be helping to boost consumer spending, which, according to Jessica Hinds at economic consultancy Capital Economics, has been performing better than feared given concerns over the general economic health of the region.

A stronger jobs market is finally filtering through to wages, while the planned fiscal stimulus in Germany and Italy should help consumer spending there in 2019. All being well, Hind expects consumer spending to rise by 1.5 percent this year and 1.7 percent in 2016. Not a bad feat for a region that was mired in crisis just a few years ago.

“With consumer confidence strong and wage pressures building, the outlook for consumer spending growth remains fairly bright,” said Hinds at Capital Economics.

However, any headline eurozone data masks individual country performances. A breakdown of retail sales data for the region showed that it’s been a mixed bag of fortunes. Unsurprisingly, Germany, Europe’s powerhouse economy, led the way with 2.3 percent growth in April, while France was in the doldrums with a 1.2 percent tumble. Spain and Portugal were also in negative territory.

According to a March health check of its members by Procos, a French association of specialized retailers including home improvement chains and toy stores, France, like the U.K., had also been a victim of bad weather, with it saying it was “a first quarter to forget quickly.”


Economic Snapshot


Interest rates: 2%

Consumer spending (Q1): 1.1%

Retail sales (m/m): 0.8%

Inflation: 0.2%

Unemployment rate: 3.8%



Interest rates: 0.5%

Consumer spending (Q1): 0.2%

Retail sales (m/m): 1.3%

Inflation (y/y): 2.4%

Unemployment rate: 4.2%



Interest rates: -0.4%

Consumer spending (Q1): 0.5%

Retail sales (m/m): 0.1%

Inflation (y/y): 1.9%

Unemployment rate: 8.5%


Source: Government data


m/m = month-over-month

y/y = year-over-year



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