Why UK consumers are on a spending spree

The fact that we're in the midst of a global recession, that jobs are being cut nationwide on a daily basis and that interest rates can't fall much further, doesn't seem to have distracted UK shoppers from hitting the high street in recent weeks.

Buoyant consumer spending, as well as an unexpectedly firm market in house prices, are the reasons behind the Bank's of England's decision to hold interest rates this afternoon.

It seems consumers are the elbow propping up the UK economy, as the manufacturing and services sector show little improvement and job losses continue.

Part of the reason for such consumer confidence is down to the nation's 16.6m homeowners, who are feeling flush with cash after seven interest rate cuts this year have cut about ?100 a month of a ?60,000 mortgage.

With nearly 70% of UK property bought rather than rented, mortgage rates make a big difference to consumer spending, and the current mortgage rates akin to those last seen in the '60s have left consumers feeling confident.

Following the September 11 attacks, consumers did initially shy away from the high-street amid fears of a recession, which seemed partly confirmed by October data showing house price growth grinding to a halt.

However, last month the Bank of England cut rates by an unexpected 0.5%, house prices took another turn upwards and consumers headed back to the shops with the pressing thought of Christmas uppermost in their minds.

What is difficult to tell is how long the consumer will continue to prop up the economy once the usual flurry of spending around the festive season comes to an end.

Certainly consumers are set to spend more this Christmas than ever, with most of it going on credit cards, but this could be part psychological as fears that the economy will suffer further next year could be resulting in a case of 'spend while you can'.

The New Year could well see such extravagant spending slow down as people gear up for a rocky ride, what with the likelihood of growing unemployment coupled with the post-Christmas hangover of mounting debts to pay off.

Certainly analysts seem divided on how the Bank of England will need to react next year.

"Consumer spending in particular is seasonally buoyed which may make the extent of the economic slowdown and the effect of the cuts to date hard to judge," said Ian McCafferty, chief economic adviser at the Confederation of British Industry.

Much of the consumer spend in January is also at the mercy of the weather. An unusually warm winter so far has meant that the clothing sector has suffered as the usual rush for winter coats and hats has failed to take place.

Unless the frost sets in for the New Year, consumers may well choose to put their purses away and start squirreling rather than spending.