pounds 25bn windfalls could trigger inflation boom
Monday 12 July 1999
Consumer demand will get out of control if the Bank of England keeps interest rates on hold or if it cuts them further, Deutsche Bank warned. It is the first time any serious attempt has been made to put a figure on the new wave of demutualisations.
Economists at the German bank have raised their forecasts for consumer spending by more than half to 3.5 per cent for both this year and 2000.
They said the impact of 2.5 per cent worth of cuts in interest rates and an accelerating housing market would combine with the windfalls to trigger extra spending.
Members of Scottish Widows will share a pounds 5.7bn bonanza from the takeover by Lloyds TSB, pounds 1.1bn will be distributed to AA members as part of Centrica's purchase of the roadside rescue group and Bradford & Bingley is on the road to a pounds 2.5bn demutualisation.
Deutsche has pencilled in up to pounds 15bn of windfalls from a insurance companies including Equitable Life, Friends provident, Scottish Life and Scottish Provident, even though it is far from certain whether these will opt to drop their mutual status. "All in all, there could be quite a substantial consumption stimulus from demutualisations in the next few years to the tune of pounds 20bn to pounds 25bn ... "There is a risk of a mini-consumer boom later in the year," it said. "If, as we expect, the Bank of England's Monetary Policy Committee keeps interest rates on hold for the next six months, or even makes further reductions, consumer demand may threaten to get out of control next year and push interest rates even higher than the 6 per cent level that we forecast."
In 1997 the Bank forecast up to 10 per cent of the windfalls would be spent in the first year, adding up to 0.4 per cent to consumer spending, and it factored the impact into its inflation forecasts. Although retail sales hit a 10-year high of 5.3 per cent in 1997, they fell sharply to 2.9 per cent last year and are now running at just 1.9 per cent. Consumer spending fell to 2.7 per cent in 1998 from 4 per cent in 1997. Deutsche said it revised up its forecast for consumer spending because of the strong labour market, loosening of monetary policy and falls in import prices.
"The prospect of more demutualisations ... may further fuel the fire of the housing market," it added.
- 1 BBC election debate: The one photo that summed up the whole 90-minute leaders debate
- 2 A bottle of wine a day is not bad for you and abstaining is worse than drinking, scientist claims
- 3 18th century sex toy found in 'toilet of sword fighting school' in Poland
- 4 'I wish my teacher knew...': Young students share their 'heartbreaking' worries in notes
General Election 2015: David Cameron catching up in polls – but he badly needs a clear lead
The Hubble Space Telescope's amazing journey 25 years on
South Africa xenophobic attacks: Shops looted and violence on streets of Johannesburg as foreigners are forced to hide in police stations
Earthworms rain down from skies over Norway, puzzling scientists
18th century sex toy found in 'toilet of sword fighting school' in Poland
The only black face in the Ukip manifesto is on the page about overseas aid
Ukip is the only main political party to not address LGBT rights in its manifesto
If I’m being racially abused I don’t need a white stranger with a saviour complex to rescue me
BBC election debate: The one photo that summed up the whole 90-minute leaders debate
Religion isn't growing, it is becoming vigorous in its demise, says philosopher AC Grayling
Russian warships in English Channel 'to conduct anti-aircraft and anti-submarine military drills'
iJobs Money & Business
£20000 - £25000 per annum + OTE £45,000: SThree: SThree Group have been well e...
£50000 - £667000 per annum + excellent benefits : Ashdown Group: IT Manager / ...
£13000 - £20000 per annum: Recruitment Genius: Scotland's leading life insuran...
£40000 - £45000 per annum + benefits : Ashdown Group: Training Programme Manag...