|
Mad dogs and Englishmen go borrowing in the midday sun. Or perhaps they remortgage. Or probably both. This scorching British summer achieved the remarkable feat of reviving the country's over-indebted consumers, as well as seeing RBS offer a Stockport-based mutt called Monty a gold credit card with a £10,000 limit.
The £10 billion record borrowing binge unearthed by Bank of England figures for June was the highest since records began a decade ago. That was before last month's cut in base rates to a 48-year low of 3.5 per cent. Retail sales figures from the Confederation of British Industry showed that July was the best month since April.
Just 10 weeks ago, a run of poor retail and mortgage figures prompted suggestions that consumers had finally thrown in the towel. That, it now seems, was merely the wobble of war. Following their marathon remortgaging in June, Britons splashed out in the July sunshine.
Yet the real economy seems shaky. April's hike in national insurance contributions has eaten into pay packets. Figures from the Office for National Statistics show that average pay fell by 1.3 per cent in the year to April, taking into account the NI increase and inflation. In the private sector, take-home pay slumped by almost 2 per cent, the equivalent of a £570 loss for somebody earning £30,000.
Such a fall is rarely accompanied by an increase in retail spending. That it is in Britain is a measure of the country's intimate relationship with indebtedness. Borrowing, on credit cards or against the still increasing value of property, is bridging the gap.
The economy may be living off borrowing, but is it on borrowed time? For new Bank of England Governor Mervyn King, the behaviour of Britain's summer shoppers is a mixed blessing. 'Damned if they spend, and damned if they don't,' says Capital Economics' Jonathan Loynes.
As the European economy remains flat and the US return rests disproportionately on war spending, the British economy is left beholden to its super-spending populace. In the short term, they are saving the day. Even with such hyperactive consumption, British growth has spluttered along at 0.1 per cent in the first quarter and 0.3 per cent in the second. Inconspicuous consumption seems to have staved off recession.
Yet what troubles are being stoked up? Perhaps King is facing his Greenspan moment. Last November, as deputy governor, he pointed out that 30 per cent annual increases in house prices were not sustainable. The message seemed to be not to overspend during the festive season by 'banking' uncertain house price rises. Markets took the message as a hint that rates were on their way back up again. A year ago, King said rates were still at a below neutral emergency level.
Yet the Bank went on to cut rates twice - once in February, and again last month. There are some parallels with Alan Greenspan's aid to the Nasdaq bubble. Having warned about irrational exuberance in 1996, he then failed to take away the punch bowl at the tech party. Does King risk repeating that mistake?
Not yet - the weak economy means that it is all part of the plan. John Butler, UK economist at HSBC, believes the Monetary Policy Committee's behaviour has changed measurably over the past 16 months. From June 1997 until mid-2002, its decisions were in line with the 'Taylor rule' - a simple relationship between past interest rates, inflation and growth. Rates were almost always within 0.25 per cent of the Taylor-suggested rates, and a maximum of 0.75 per cent for almost five years. Since then, base rates have diverged significantly below the 5.5 per cent suggested by the rule - a gap of two percentage points above the official base rate of 3.5 per cent.
As Butler says, this does not mean the Bank is 'wrong', but that it has changed the way it reacts to the economy. This shift has occurred at the same time as its 'two speeds are better than none' strategy, which essentially saved the economy from recession by continuously bailing out the housing market.
Low interest rates would help support the economy by boosting borrowing, whereas verbal warnings would prevent that boom getting out of control. It was, and still is, a delicately balanced act. But it was underpinned by the fact that the Bank's single remit was to maintain inflation at 2.5 per cent - and the single instrument of interest rates was there to meet that target.
'The MPC will have little choice but to continue to offset weakness in exports and investment by keeping household spending up - even if this means encouraging more borrowing by cutting interest rates further,' says Loynes.
Indeed, Bank insiders were relaxed about debt levels, at least before last week's figures. MPC member Paul Tucker said there were 'good reasons for thinking households can carry more debt', given low interest rates.
All of which suggests that the Bank is in no hurry to yank rates back up - a continuation of its change of course. But has MPC monetary policymaking become more of an art than a science?
In January, an independent review concluded that the Bank's dated modelling process meant the committee was 'flying blind'. But alongside King's arrival at the Bank's helm, has been a new economic model, thought to be yielding markedly different results from the old one. The state-of-the-art tool will be piloted alongside the old model for at least six months. It could support the Bank's apparent shift in behaviour by suggesting a lower 'neutral' level of interest rates. There may be a change to the forecast of a benign slowdown in the housing market.
It could explain the relaxed attitude of Bank insiders. And it may just undermine the furious activity in the money markets on Friday, which saw a huge 0.4 per cent added to rate expectations. Futures markets suggest that the City expects rates to be hiked this year and to be near 5 per cent by the end of 2004.
But with a new Governor, two new MPC members, a new inflation measure, a new target and a new economic model, perhaps there's a New Lady on Threadneedle Street.
faisal.islam@observer.co.uk
|
Latest press releases 
