The Monetary Policy Committee (MPC) has noted that consumer spending played a part in its decision to cut the base rate this month, as it was down in December, illustrating that consumers are being hit by a shortage of credit and tighter budgets as they strive to keep up with rising costs of energy and food in addition to higher mortgage repayments as they come off fixed rate deals.
Consumers will be glad to know, therefore, that the decision by the MPC to cut the base interest rate this month was a unanimous one, with each member voting in favour, according to the minutes from the February MPC meeting which were released on Wednesday.
According to the minutes, "Consumption growth appeared to have eased. Retail sales volumes had fallen by 0.4% in December, although were still 2.7% higher than December 2006" and "retailers’ profit warnings had increased." These figures are making alarm bells ring, because this indicates a continuing hardship as it suggests that consumers are cutting back on their spending in order to meet day-to-day costs.
The MPC also outlined declines in the housing market, noting that mortgage
approvals for house purchase have reached their lowest levels since 1995. However, in a statement released on Wednesday, the Council of Mortgage Lenders (CML) said that gross mortgage lending rose to an estimated £26.5 billion in January, an 11 per cent increase from £23.9 billion in December, and reached a similar level to that of January 2007 when it was £26.6 billion.
But Michael Coogan, Director General of CML did say that "there is considerable uncertainty in the housing market at the moment and we expect lending volumes to be lower in the coming months."
The members of the MPC agreed that rates are still too restrictive in light of the fact that current credit conditions are limiting the effect of rate cuts, and eight of nine called for a .25 percentage point cut.
The ninth member, David Blanchflower, characteristically voted for a "larger, precautionary reduction" of .50 per cent, arguing that the situation in the UK economy is mirroring that in America, where the Federal Reserve reduced interest rates by a massive 1.25 per cent in January.
Experts predict that Mr Blanchflower's wishes will not be met in the near future, expecting rate cuts to be gradual as the MPC tries to keep inflation in check as it rises well above target in the coming months.
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