The Observer today, whilst welcoming the rate cut as a stimulus to Christmas spending warns that Britain's 'buy-now-pay-later' faces a reckoning. Household debt now amounts to an 'extraordinary 160% of GDP; and as banks struggle with rising financing costs, the housing market - and consumer spending - are at risk.' We are overindebted, the housing market is due for a significant correction (see recent house price data from Halifax and Nationwide) and a number of global factors are moving against us.
It suggests that the decision to cut interest rates was far from easy,. The economy is coping with two shocks simultaneously: a renewed jump in oil and food prices, putting upward pressure on inflation; and a credit squeeze. The MPC had to decide which was creating the greater risk. The committee will also have had a cautionary tale from the recent past in their minds. In late 2004 and early 2005, the housing market slowed sharply, in what many observers believed at the time was the beginning of a long-anticipated slowdown. House price inflation slipped rapidly, from 17.6 per cent in 2004 on the Nationwide measure to just 4.3 per cent in 2005. As consumer spending slowed, the Bank made a one-off rate cut in August 2005. The financial impact of the cut was small, but the effect was huge. Analysts were astounded at the speed with which confidence returned; home buyers flooded back into the market and prices took off again.
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