BoE: Housing slowdown may depress spending

The Bank of England may have underestimated the impact of the British housing market slowdown on consumer spending, a report showed today.

The housing market will probably stay subdued in the short term, which could curb spending by more than the Bank had assumed three months ago, the Bank’s quarterly inflation report said.

It was also possible that the impact of five interest-rate rises since November 2003 had not yet fully worked through, resulting in continued growth in debt servicing burdens.

The Bank’s Monetary Policy Committee (MPC) said consumer spending could rise if recent uncertainty about interest rates and the housing market subsided.

But the MPC said that, overall, it believed consumption was more likely to fall than to rise.

It said it had noted at its meeting on Monday that considerable uncertainty about strength of consumption and inflation prospects surrounded its expectation that output growth was set to remain near trend, with inflation close to the Chancellor’s 2% target throughout the Bank’s two-year forecast period.

The MPC said that lay behind its decision on Monday to keep interest rates at 4.75% for the ninth month in a row.

The report said: “In the light of this outlook and bearing in mind the balance of risks, the Committee judge that no change in the current level of the official interest rate was necessary to keep inflation on track to meet the targets in the medium term.”

Bank Governor Mervyn King later told journalists in a news conference that profit warnings from a number of retailers, business surveys, reports from the high street and official data on retail sales had all pointed to an easing of consumer spending.

The evidence now suggested that consumption’s contribution to growth in economic activity was lower than for some years.

“The committee’s central view is for household spending growth to recover, but to remain below the average of recent years,” he said.

Mr King said it was impossible to say for certain how the housing market would go in the future.

But he added: “The message of the last three to six months is that it looks as though the house market has stabilised.”

The MPC said it believed inflation would move above Chancellor Gordon Brown’s two per cent target in the near term, partly due to the influence of temporary factors such as higher prices for water and sewerage services.

It would then ease back before settling around the target, the report said.

Mr King said: “The central projection is that inflation remains close to the two per cent target throughout the forecast period.”