Select Committee on Treasury Minutes of Evidence

Memorandum submitted by Bridget Rosewell, Volterra Consulting


  The Bank suggests that the consumer is becoming more optimistic again, after a weak first half to 2005. A better autumn for consumer spending as a whole was not mirrored in retail sales which saw the worst performance for twenty years. A recovery over Christmas has been followed by a poor January.

  Although the consumer may not be entirely miserable, neither he nor she is feeling particularly optimistic. Both rising petrol prices and rising tax rates, as the Bank points out, have reduced spending power, while savings rates have picked up. Whether this is to do with higher interest rates or warnings about pensions is a moot point.

  Even to achieve historic average growth in 2006 is close to optimistic.


  It is perhaps surprising that the Bank is so puzzled about the failure of investment to pick up. Lower long term rates are from one perspective merely compounding the difficulties faced by their pension funds. As rates fall the deficit gets still larger and annuity rates more scary. No wonder there is nothing left for investment in new value added.

  This is a very serious problem. Low rates are inflating existing assets and deterring the creation of new ones. Though borrowing is easy, money is chasing the safe thing and making it less attractive. Returns on commercial property are now down to 5%, in spite of the illiquidity and lumpiness of these investments. But they are seen as safe havens in a world which lacks them.

  The Bank is right to be worried about this. It should also be using its clout and understanding of money markets to educate the pensions regulator who seems bent on making things worse.


  Households are much more affected by petrol than gas prices. The chart below shows the proportion of household incomes that go on these. The gap is closest in London but that is largely because there is less use of petrol. Thus the big impact on households which might increase wage pressure has probably already happened—at least so long as the view that the big rises in oil prices has already happened.

  For businesses, however, the picture may well be different. Many businesses are only now beginning to feel the pinch of new fuel contracts. Retailers in particular are seeing increasing property costs across the board and will find it increasingly difficult not to raise prices.

  It seems increasingly less likely that the Bank will be willing to cut rates in the face of reasonable growth, low long term rates, and cost pressures.

February 2006

previous page contents

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2006
Prepared 15 May 2006