Bank of England: Consumer caution felt by businesses as cost-of-living worries persist
Bank of England: Consumer caution felt by businesses as cost-of-living worries persist
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This article contains amendments to an earlier version.
Dr. Catherine L Mann, an external member of the Bank of England’s Monetary Policy Committee (MPC), has told Businessin Wales that British consumers are tightening their belts in order to have “rainy day funds” to tap into, changing spending habits which are being felt businesses.
Speaking during a visit to Newport, South Wales, where the Bank of England (BoE) was hosting one of its regular citizen feedback sessions, Mann highlighted the Bank’s ongoing efforts to gather insight from across the UK.
“We want to make sure we get a full sense of what’s going on outside of London, in the business community, in the community of people,” she said.
Despite inflation dropping considerably from its 2022 peak, many households remain wary of spending. Mann noted a trend among consumers: an inclination to save rather than spend, even among those struggling to make ends meet.
Mann said: “The prices of things have changed so much and are variable so that you don’t know exactly how much you are going to need to get you to the end of the month.”
“People are keeping a little bit of a rainy-day fund or a little bit of a savings buffer. For example, they’re putting off taking that vacation or that holiday that they until they can get a sense of what their finances are.”
Certain industries are feeling the pinch more than others. Many businesses in the hospitality, leisure and retail sectors, heavily reliant on discretionary spending, are reporting weaker performance compared to pre-pandemic levels. Consumers who once dined out or planned getaways are now tightening their belts.
“It is a tricky climate because people have been saving so much. That means, of course, they have not been consuming as much as they did pre-COVID as a share of their paycheck.
“Now, that may make them feel individually more comfortable, having this buffer. But collectively, of course, that adds up to less demand and specifically across hospitality, recreation, restaurants and some retail.”
However professional services, such as accounting and legal firms, have been more resilient. These sectors continue to see steady demand and, in some cases, growth.
Another major factor influencing spending patterns is mortgage refinancing. As many homeowners move off historically low fixed-rate deals, they’re being confronted with significantly higher monthly payments. This is compounding financial pressure and further reducing disposable income.
Mann said: “If people do have a mortgage, and they initially financed that mortgage a number of years ago at a much lower interest rate, they’re worried about making sure that they can make the higher mortgage payments that might be associated with a refinancing situation.
“So, there’s quite a bit of saving that is part now of the overall economic landscape and understanding how long that saving will continue to last becomes a very important ingredient when we think about consumer behaviour in the various parts of the UK.”
These trends are feeding into the Bank of England’s monetary policy deliberations. Mann said that citizen and business feedback, gathered through extensive regional outreach, is central to the Bank’s decision-making.
The MPC meets eight times a year to decide whether interest rates should be raised, lowered or held steady. While inflation has cooled, it remains above the Bank’s 2% target.
Mann said: “We have seen wage rates come down, so people are getting wage increases, but not at the rate in the past. And we’ve seen price inflation come down quite a bit, but it’s still a challenge because it’s still well above our 2% objective.
“It’s important for us to continue to use monetary policy in order to get us to that 2% inflation objective because inflation is a tax on everybody. It makes what it is that you buy more expensive. So, it is very important for us to get to that 2% objective”
For small and medium-sized enterprises (SMEs) in particular, the reduced consumer demand comes on top of other pressures, such as rising wage expectations, supply chain uncertainty and energy costs.
Mann’s visit to Wales included not only economic discussions but also public engagement around a more symbolic topic: banknote design.
While the next generation of UK banknotes will feature the monarch, the Bank is also soliciting public input on what else should be represented, be it historic figures, national landmarks or culturally significant themes.
Mann said: “We’re not a completely cashless society. 25% of people still use cash. We find a lot of people want to use cash in order to budget because they know exactly what’s available in the month.
“So, cash continues to be a very important part of economic life. People look at it every day. So having something on there that you recognise and that you can say: ‘that means something to me’, I think is important in terms of what should be on the bank note.”
As the UK economy continues its post-pandemic recalibration, the path ahead remains uncertain. With interest rates still relatively high and inflation not yet back to target, the business community is bracing for a prolonged period of cautious consumer spending.
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