There is a whole generation of homeowners who have only ever known interest rates to fall. The last rate rise was back in July 2007, back in the days when you could still smoke in pubs, Gordon Brown was Prime Minister, and Rihanna’s Umbrella was number one.
So it’s not surprising that plenty of people are worried about what the November 2017 base rate rise will mean for the UK. When it comes to the consumer economy, though, Mintel’s view is that the increase will have a pretty modest impact on most people.
There will inevitably be some borrowers who are already stretched to the limit, and who will be tipped from financial strife into financial crisis. And at the upper end of the market, some savers will receive a small but welcome boost to their income. But for most people, the rate rise will change very little. What it does do, though, is add another piece of bad news to the slow drip… drip… drip… of negativity that risks undermining consumer confidence and, in turn, consumers’ willingness to spend.
Measuring the impact on consumer budgets: for mortgage-holders…
The most obvious impact is on mortgage repayments. But latest data from UK Finance shows that 57% of mortgage holders are on a fixed-rate deal, and more than 90% of new borrowers are opting for fixed deals. For them, the rate increase will have no direct impact.
Even among those with variable or tracker rate deals, the increase should be manageable for most. The average outstanding balance on a tracker mortgage is £131,000, meaning that the rate increase will add less than £20 to people’s monthly mortgage payments.
Importantly, Mintel’s financial confidence data shows that mortgage-holders are significantly more upbeat than renters. Around three in four say that their finances are “healthy” or “OK”, and 85% say that they are either “confident” about their finances over the coming year, or that they are “concerned, but should be fine”. So while no one ever welcomes an extra £20 on their monthly bills, relatively few mortgage holders are likely to hit financial crisis point as a direct result of the rate increase.
…for credit-card and personal loan users…
When it comes to household financial well-being, perhaps the biggest concern is the level of outstanding consumer credit. As shown in our latest Consumers and the Economic Outlook – UK – 2017 report, an increasing proportion of people are saying that their finances have deteriorated over the last year. This reflects the return of the income squeeze, with real wages failing to keep pace with rising inflation.
Rather than cutting back on spending, many people have been using credit cards and personal loans to bridge that gap between price increases and wage growth. Consumer credit lending has been growing at 10% a year, compared to average wage increases of less than 3%.
There are definitely signs of financial stress among some borrowers. Mintel’s Consumer Attitudes towards Debt – UK – 2017 report showed that among people with at least £10,000 of outstanding consumer credit, 11% said that they were either struggling to make ends meet or were already in financial trouble. Any interest in borrowing costs could be enough to shift some of the most vulnerable borrowers from “struggling” to “crisis point”.
But the base rate increase should be manageable for all but the most vulnerable of borrowers, particularly as consumer credit rates are less directly linked to base rates than is the case with mortgages. In particular, the vast majority of personal loans are made on a fixed rate basis, meaning that the increase will have next-to-no impact on existing borrowers.
…and for savers
If the rate rise is unlikely to have an immediate impact on the behaviour of borrowers, it’s even less likely to affect savers. Mintel’s Consumers, Saving and Investing – UK – 2017 report shows that 60% of adults have less than £10,000 in savings or investments.
Even for someone with £10,000 tucked away, an extra 0.25% translates to just £25 a year. Few people are going to rush to the shops because they’ve got an extra £2 a month to spend. The truth is that for many savers, the real payoff is the feeling of security that having a few months’ salary tucked away, rather than the financial returns. Brexit-related economic uncertainty means that even if interest rates increase, many people will choose to bank the extra money, rather than rush out and spend it.
What does it mean for the high street?
We have predicted that spending over the crucial Christmas trading period will be up 1-2% on 2016. That’d represent a solid performance, given that 2016 was a good Christmas, making for a tough comparison. The interest rate increase doesn’t change this forecast: we don’t think that a 0.25% change in base rates will be enough to significantly shift consumer spending in the short-term.
Longer-term, though, the picture looks less positive. On its own, the base rate increase shouldn’t have a huge impact on spending. But when added to the continuing squeeze on real incomes and the broader economic and political uncertainty in the UK, it can’t help but undermine sentiment.
At the moment, the consumer economy is being kept afloat by people’s willingness to borrow money in order to maintain their lifestyle. Mintel’s consumer confidence measures show a curious disconnect between people’s assessment of how their finances have changed over the last year, and how they expect to fare over the coming 12 months.
A growing proportion say that they’re worse-off – but at the moment, this isn’t feeding through into how they expect their finances to fare over the coming year, and it’s not feeding through into spending intentions. The real problem for the consumer economy will be if this disconnect narrows. If people start to believe that the income squeeze is here for the long-term, then there’s a real risk that they will cut back on spending in order to build up precautionary savings. We don’t seem to be at that point quite yet, but this interest rate rise can’t help but bring it that little bit closer. It’s not the direct impact of the rate rise that consumer-facing brands need to worry about: it’s more the message that it sends to shoppers.
Toby Clark is the Director of Research EMEA at Mintel , where he has worked for over 10 years. Toby leads a large team of researchers who produce over 500 consumer reports annually on UK and European market sectors. Prior to this, Toby was Head of UK Financial Services research at Mintel.
