The U.S. is powering ahead with interest rate hikes, but the U.K. isn’t following suit as the consumer spending recovery policymakers had been hoping for has yet to materialize.
The Bank of England, Britain’s central bank, sat on its hands today, leaving rates at 0.5 percent, noting that modest growth has been driven by trade and business investment and not increased consumer spending.
Months of bad weather, including the so-called “beast from the east,” limited wage rises and stretched household finances have deterred consumers from spending, hitting retailers hard and weighing on economic momentum.
Just Wednesday, department store chain Debenhams issued its third profit warning in six months, with its chief executive officer Sergio Bucher citing increased competitor discounting and stating that “these are exceptionally difficult times in U.K. retail.”
Last week, its rival House of Fraser announced that it would have to close 31 stores, the equivalent of over half its portfolio, affecting 6,000 jobs.
As a result of lackluster consumer spending, the British Chambers of Commerce, Britain’s biggest lobbying group, this week cut its growth forecast for the year to 1.3 percent, down from 1.4 percent. If this becomes a reality, it will be the lowest growth since the depths of the global downturn in 2009.
Despite these tough conditions, analysts have not ruled out a rate rise in August after the Bank of England’s chief economist became one of three members of the nine-strong rate setting Monetary Policy Committee to push for a rise this month, only to be outvoted by their colleagues.
Michael Metcalfe, global head of macro strategy at State Street Global Markets, said: “The MPC appears to want to send a signal that markets should not be complacent over the pace of tightening and their desire to start normalising UK monetary policy.”
In contrast, the U.S. Federal Reserve last week raised interest rates for the second time this year to 2 percent. It also indicated that it wasn’t done with hikes this year and that two more could be on their way, followed by another three in 2019, with rates expected to hover around 3.4 percent in 2020.