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.

PROMOTED VIDEO
Arts and Entertainment
AKB48 perform during one of their daily concerts at Tokyo’s Akihabara theatre
musicJapan's AKB48 are one of the world’s most-successful pop acts
News
Ian Thorpe has thanked his supporters after the athlete said in an interview that he is gay
people
News
The headstone of jazz great Miles Davis at Woodlawn Cemetery in New York
news
Arts and Entertainment
Brendan O'Carroll has brought out his female alter-ego Agnes Brown for Mrs Brown's Boys D'Movie
filmComedy holds its place at top of the UK box office
News
newsBear sweltering in zoo that reaches temperatures of 40 degrees
Arts and Entertainment
Professor Kathy Willis will showcase plants from the Royal Botanic Gardens at Kew
radioPlants: From Roots to Riches has been two years in the making
News
ebookA unique anthology of reporting and analysis of a crucial period of history
Arts and Entertainment
TV The follow-up documentary that has got locals worried
Arts and Entertainment
Eminem's daughter Hailie has graduated from high school
music
Arts and Entertainment
Original Netflix series such as Orange Is The New Black are to benefit from a 'substantial' increase in investment
TVHoax announcement had caused outrage
Life and Style
Swimsuit, £245, by Agent Provocateur
fashion

Diving in at the deep end is no excuse for shirking the style stakes

News
One Direction star Harry Styles who says he has no plans to follow his pal Cara Delevingne down the catwalk.
peopleManagement confirms rumours singer is going it alone are false
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

Information Security Manager (ISO 27001, Accreditation, ITIL)

£70000 per annum: Harrington Starr: Information Security Manager (ISO 27001, A...

Biztalk - outstanding opportunity

£75000 - £85000 per annum + ex bens: Deerfoot IT Resources Limited: Biztalk Te...

Trade Desk Specialist (FIX, Linux, Windows, Network Security)

£60000 per annum: Harrington Starr: Trade Desk Specialist (FIX, Linux, Windows...

Service Desk Analyst (Windows, Active Directory, ITIL, Reuter)

£35000 per annum: Harrington Starr: Service Desk Analyst (Windows, Active Dire...

Day In a Page

Super Mario crushes the Messi dream as Germany win the 2014 World Cup in Brazil

Super Mario crushes the Messi dream

Germany win the 2014 World Cup in Brazil
Saharan remains may be evidence of the first race war, 13,000 years ago

The first race war, 13,000 years ago?

Saharan remains may be evidence of oldest large-scale armed conflict
Scientists find early warning system for Alzheimer’s

Scientists find early warning system for Alzheimer’s

Researchers hope eye tests can spot ‘biomarkers’ of the disease
Sex, controversy and schoolgirl schtick

Meet Japan's AKB48

Pop, sex and schoolgirl schtick make for controversial success
Iraq crisis: How Saudi Arabia helped Isis take over the north of the country

How Saudi Arabia helped Isis take over northern Iraq

A speech by an ex-MI6 boss hints at a plan going back over a decade. In some areas, being Shia is akin to being a Jew in Nazi Germany, says Patrick Cockburn
The evolution of Andy Serkis: First Gollum, then King Kong - now the actor is swinging through the trees in Dawn of the Planet of the Apes

The evolution of Andy Serkis

First Gollum, then King Kong - now the actor is swinging through the trees in Dawn of the Planet of the Apes
You thought 'Benefits Street' was controversial: Follow-up documentary 'Immigrant Street' has got locals worried

You thought 'Benefits Street' was controversial...

Follow-up documentary 'Immigrant Street' has got locals worried
Refugee children from Central America let down by Washington's high ideals

Refugee children let down by Washington's high ideals

Democrats and Republicans refuse to set aside their differences to cope with the influx of desperate Central Americas, says Rupert Cornwell
Children's books are too white, says Laureate

Children's books are too white, says Laureate

Malorie Blackman appeals for a better ethnic mix of authors and characters and the illustrator Quentin Blake comes to the rescue
Blackest is the new black: Scientists have developed a material so dark that you can't see it...

Blackest is the new black

Scientists have developed a material so dark that you can't see it...
Matthew Barzun: America's diplomatic dude

Matthew Barzun: America's diplomatic dude

The US Ambassador to London holds 'jeans and beer' gigs at his official residence – it's all part of the job, he tells Chris Green
Meet the Quantified Selfers: From heart rates to happiness, there is little this fast-growing, self-tracking community won't monitor

Meet the 'Quantified Selfers'

From heart rates to happiness, there is little this fast-growing, self-tracking community won't monitor
Madani Younis: Five-star reviews are just the opening act for British theatre's first non-white artistic director

Five-star reviews are just the opening act for British theatre's first non-white artistic director

Madani Younis wants the neighbourhood to follow his work as closely as his audiences do
Mrs Brown and her boys: are they having a laugh?

Mrs Brown and her boys: are they having a laugh?

When it comes to national stereotyping, the Irish – among others – know it can pay to play up to outsiders' expectations, says DJ Taylor