Interest rate rises could harm growth, says Bank of England


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The Independent Online

Putting up interest rates is liable to depress consumer spending and hold back the recovery, according to new research from the Bank of England.

If rates were to go up from their present historic low of  0.5 per cent, the economic boost from savers spending more would probably be outweighed by the drag of borrowers spending less.

The survey findings, contained in this week’s Inflation Report from the Bank, serve to bolster the case for the its rate-setting Monetary Policy Committee (MPC) to leave the cost of borrowing at 0.5 per cent for a while longer.

The findings are significant because groups such as Save Our Savers and Saga, which have been campaigning for higher rates, have argued that boosting the return on savers’ banks deposits will help the economy. These groups assert that savers will spend any additional interest income, helping growth, but the Bank’s findings cast doubt on that belief.

Its survey of 6,000 households, conducted by NMG Consulting in September, found 57 per cent of households with net debts would cut their spending if rates went up by two percentage points.

However, only 10 per cent of households with net savings indicated that they would increase their spending in response to a rate rise of that size. Almost half said they would do nothing and let the additional interest accumulate in their bank accounts.

In the overall survey sample, 27 per cent were classified as net borrowers while 47 per cent were net savers (with more than £4,999). The rest had insufficient net borrowings or savings to fit in either category.

Household spending has been a key support for the economy, accounting for about a third of the growth in each quarter on average over the past year. Business investment, by contrast, has accounted for only a quarter of growth.

Savings lobby groups complain that historic low interest rates since 2009 have in effect  transferred income from savers to borrowers. The Bank has expressed sympathy with savers but argued that, without low rates and monetary stimulus, the whole economy would have been pushed into recession.

The MPC voted this month to keep interest rates at 0.5 per cent, and financial markets do not now expect the first rise to come until next autumn. However, two members of the MPC, Martin Weale and Ian McCafferty, are voting for rates to rise by 0.25 per cent.