Spend, spend, spend to trigger increases

Economists warn of higher rates as multi-billion windfall spree benefits car makers, holiday firms - and dentists

The consumer spending spree, fuelled by free shares from building societies converting into banks, could keep up the pressure for the Bank of England to raise interest rates well into the second half of this year, according to economists.

The warnings come days before the Bank's monetary policy committee is thought likely to increase the cost of borrowing by another quarter-point to 7 per cent. It meets on Wednesday and Thursday.

New calculations by David Walton at Goldman Sachs suggest that the consumer windfalls could have added up to pounds 2bn to spending during the first half of this year. "This suggests there is plenty of scope for retail sales to receive a further substantial boost during the second half of the year," he writes.

Anecdotal evidence suggests that spending on items such as foreign holidays and cars - neither included in the official retail sales figures - has soared since June.

Another expert warned yesterday that interest rates should rise to 8 per cent to avoid an inflationary boom, despite the punitive impact that would have on exporters.

Chris Wright, economics director of Barclays Bank, said: "On balance, the best chance of avoiding a more volatile growth and inflation cycle still seems to be to raise rates further."

So far this year the flotations on the stock market of Alliance & Leicester, Halifax, Woolwich and Norwich Union have given millions of people free shares worth pounds 22bn in total. More than a fifth were sold immediately.

It is impossible to be certain where this pounds 4.5bn has gone. But, comparing retail sales in the first half of this year to the level that would have been expected given rising incomes and falling unemployment, Mr Walton estimates that the extra boost has amounted to pounds 800m.

With retail sales accounting for only 40 per cent of consumer spending, this implies a pounds 2bn boost to the total from the share windfalls so far.

The rest will have been put into other forms of saving. The Building Societies Association reported the biggest monthly inflow of deposits since 1986 during June, and suggested this was caused by carpetbaggers looking for the next society to convert. The inflow amounted to pounds 1.8bn in June compared with pounds 878m in May.

Sales of PEPs and unit trusts also roared ahead, although the main high street banks reported that retail deposits in June rose by slightly less than the recent monthly average of pounds 2.1bn.

A survey conducted for the British Retail Consortium suggested that eventually about a third of the bonanza shares, expected to add up to pounds 35bn by the end of 1997, would be sold.

Mr Walton estimates that if half of this amount were spent, and the rest saved, the direct boost to consumer spending would be pounds 5.5bn.

There could be an additional indirect effect from reductions in other forms of savings as a result of holding the new shares.

According to the BRC survey, people are most likely to spend windfall money on holidays (33 per cent), new kitchens, bathrooms and home improvements (20 per cent), household goods such as carpets and furniture (17 per cent) and cars (11 per cent).

In addition, more than one in eight said that they would use windfall receipts to pay off other debts.

The second quarter of the year brought a sharp increase in the proportion of borrowers up to date with their payments on credit agreements, according to Equifax, the credit scoring agency.

Start your day with The Independent, sign up for daily news emails
PROMOTED VIDEO
ebooks
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Selby Jennings: Oil Operations

Highly Competitive: Selby Jennings: Our client, a leading European Oil trading...

The Jenrick Group: Night Shift Operations Manager

£43500 per annum + pension + holidays: The Jenrick Group: Night Shift Operatio...

SThree: Trainee Recruitment Consultant - LONDON

£20000 - £25000 per annum + OTE £40,000 + Car + Pension: SThree: SThree are a ...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £35K: SThree: We consistently strive to be the...

Day In a Page

Isis in Iraq: Yazidi girls killing themselves to escape rape and imprisonment by militants

'Jilan killed herself in the bathroom. She cut her wrists and hanged herself'

Yazidi girls killing themselves to escape rape and imprisonment
Ed Balls interview: 'If I think about the deficit when I'm playing the piano, it all goes wrong'

Ed Balls interview

'If I think about the deficit when I'm playing the piano, it all goes wrong'
He's behind you, dude!

US stars in UK panto

From David Hasselhoff to Jerry Hall
Grace Dent's Christmas Quiz: What are you – a festive curmudgeon or top of the tree?

Grace Dent's Christmas Quiz

What are you – a festive curmudgeon or top of the tree?
Nasa planning to build cloud cities in airships above Venus

Nasa planning to build cloud cities in airships above Venus

Planet’s surface is inhospitable to humans but 30 miles above it is almost perfect
Surrounded by high-rise flats is a little house filled with Lebanon’s history - clocks, rifles, frogmen’s uniforms and colonial helmets

Clocks, rifles, swords, frogmen’s uniforms

Surrounded by high-rise flats is a little house filled with Lebanon’s history
Return to Gaza: Four months on, the wounds left by Israel's bombardment have not yet healed

Four months after the bombardment, Gaza’s wounds are yet to heal

Kim Sengupta is reunited with a man whose plight mirrors the suffering of the Palestinian people
Gastric surgery: Is it really the answer to the UK's obesity epidemic?

Is gastric surgery really the answer to the UK's obesity epidemic?

Critics argue that it’s crazy to operate on healthy people just to stop them eating
Homeless Veterans appeal: Christmas charity auction Part 2 - now LIVE

Homeless Veterans appeal: Christmas charity auction

Bid on original art, or trips of a lifetime to Africa or the 'Corrie' set, and help Homeless Veterans
Pantomime rings the changes to welcome autistic theatre-goers

Autism-friendly theatre

Pantomime leads the pack in quest to welcome all
The week Hollywood got scared and had to grow up a bit

The week Hollywood got scared and had to grow up a bit

Sony suffered a chorus of disapproval after it withdrew 'The Interview', but it's not too late for it to take a stand, says Joan Smith
From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?

Panto dames: before and after

From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?
Thirties murder mystery novel is surprise runaway Christmas hit

Thirties murder mystery novel is surprise runaway Christmas hit

Booksellers say readers are turning away from dark modern thrillers and back to the golden age of crime writing
Anne-Marie Huby: 'Charities deserve the best,' says founder of JustGiving

Anne-Marie Huby: 'Charities deserve the best'

Ten million of us have used the JustGiving website to donate to good causes. Its co-founder says that being dynamic is as important as being kind
The botanist who hunts for giant trees at Kew Gardens

The man who hunts giants

A Kew Gardens botanist has found 25 new large tree species - and he's sure there are more out there