Memorandum submitted by Bridget Rosewell,
Volterra Consulting
CONSUMERS
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.
INVESTMENT
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.
INFLATION
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
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