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How an interest rate rise could shrink consumer spending

calculatorA significant part of the UK’s economic recovery could be lost if the Bank of England raises the base rate – even by just half a per cent.

Nearly £2bn would be wiped from consumer spending according to Conlumino, a retail sector analyst, were the rate to be raised from its current record low of 0.5%.

In the firm’s June survey, 56.9% of respondents said they believed interest rates would rise before the end of 2014, compared to 13.6% in May.

Bank of England forecasts suggest economic growth of 3% in 2014 and this is leading to suggestions that the rate will then be hiked up.

According to Conlumino, a 0.5% increase would slash £1.877bn from consumer spending as households with variable rate debts would be faced with higher monthly repayments.

This would mean there is less disposable income available which would then impact upon the retail sector, the firm claims.

High rates of consumer spending in recent months have also meant less is available via savings pots according to the analyst – increasing the levels of financial strain placed on people’s accounts.

“We are an indebted nation, so while rates increases may be helpful to some savers, to most consumers it would mean higher repayments on mortgages or unsecured debt,” said Neil Saunders, managing director of Conlumino.

“Many people have adapted their household budgets to a low interest environment so any increase is initially going to come as a bit of a shock.”

Mark Carney, the governor of the Bank of England revealed that rates changes may come sooner than expected in his annual Mansion House speech.

But both he, and other policymakers at the Bank, have consistently said that rates will only rise gradually to prevent interest rate shocks.

Any families or individuals that have carefully budgeted to ensure repayments could be forced into a reshuffle when these changes occur.

Unsecured loans could help them overcome any large obstacles but they should not be viewed as a long-term solution to debt issues or other financial distress.

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Andrew Wayland
Marketing Director at Everyday Loans
Andrew Wayland is a financial marketing expert and helped set up Everyday Loans back in 2006. Prior to his position as Head of Marketing for Everyday Loans he worked as the Head of Commercial Development for a tech start up and ran his own PR agency for around 5 years. LinkedIn: https://www.linkedin.com/in/andrew-wayland-9018074