High consumer confidence in interest rates despite market fragility

28 August 2007
Consumers have had higher hopes for interest rates and economic growth, and higher job security in August than in July, despite the recent volatility of the market, the latest Consumer Barometer from Lloyds TSB Corporate Markets has found.

The knock-on effect of the current situation in the US sub-prime mortgage market has been taking its toll on the UK financial market, with many lenders following suit by tightening their lending conditions, withdrawing bad credit mortgage offers and hiking interest rates to recoup losses from a high number of repossessions.

The Consumer Barometer revealed that, despite negative opinions about price expectations, consumers are becoming more optimistic about interest rates, with the balance of those predicting higher rather than lower rates in 12 month’s time falling to a six-month low – 69 per cent in August, compared to 74 per cent in July.

A knock-on effect of this optimism can also be seen in the increased job security recorded during August – the number of consumers feeling more secure rather than less secure in their jobs rebounded to naught per cent from minus 4 per cent in June and July.

While faith in interest rates and job security are stronger, August consumer expectations regarding prices have remained dubious; the balance of consumers who believe prices went up rather than down in the last 12 months remained constant at 58 per cent. The majority also predicted a rise in inflation of between 2.5-3 per cent in the next 12 months.

Trevor Williams, chief economist for Lloyds TSB Corporate Markets, said: “The recent financial market volatility, coupled with July’s encouraging inflation figures, has prompted economists to reign in their interest rate expectations and it seems like consumers have followed suit. For the first time in six months we’ve seen a positive sign in consumer opinion that interest rates may finally have reached their peak in the current cycle.

“This change in sentiment, coupled with the boost from improved job security, suggests that the coming economic slowdown will be one that steers clear of recession, despite the fact that the full impact of the five interest rate rises so far has not yet been felt.”

Learn more about the knock-on effect of the sub-prime mortgage meltdown