Interest rate rise; is consumer spending about to drop?

Rod Newing

August 6, 2018

On Thursday, the Bank of England announced they were increasing interest rates to 0.75%.

And immediate reaction from business leaders was one of concern – the Institute of Directors went as far as stating that “The rise threatens to dampen consumer and business confidence at an already fragile time”.

But are consumers’ really as worried as business leaders perceive?

On-the-day agile research from Maru/edr uncovered a clear divide of opinions amongst consumers – of those aware of the interest rate rise in the hours following the announcement,  38% actually welcomed the news.

Wider implications for spending

While a rise in interest rates may have significant consequences for macroeconomic behaviour, it is the impact on saving and spending at household level where the implications on interest rate rises can truly hit home.

Previous experience tells us consumers will change their spending and saving behaviours in order to get the best outcome from any interest rate rise – and therefore Thursday’s announcement has broader repercussions outside of just the financial services industry.

While wider discussions will typically focus on saving and borrowing, Maru/edr results highlight that we’re likely to witness more significant changes for spending instead – especially impacting the retail, hospitality and travel industries.

Spending to drop in retail and hospitality

For those consumers worried about the interest rate rise, almost half (48%) are likely to reduce spending on large household items, while 47% stated they will consider cutting back on technology and gadgets and 45% will budget less for eating out.

Thursday’s announcement reinforces the importance of delivering exceptional experiences across touchpoints

It appears that while interest rate rises will not directly impact frontline goods and services, the effect of increases to both mortgage and rental payments will have a detrimental influence on consumer spending. It means that for retailers and restaurant brands already struggling against difficult trading conditions and changing consumer behaviour, Thursday’s announcement reinforces the importance of delivering exceptional customer experiences across all touchpoints.

In fact, with purse strings tightening, it’s extremely likely that consumers will continue to shop around, regularly utilising digital channels to compare prices and read reviews. A compelling digital customer experience has therefore never been more important.

We can’t ignore the impact on consumer borrowing

Despite the impact on consumer spending to be felt more widely across markets, we can’t disregard the implications that an interest rate rise will have on borrowing.

Comparing Thursday’s agile survey results to those at the time of the last interest rate rise in November 2017, 53% of consumers are likely to shop around for borrowing products – an increase of 20% wave-on-wave.

With payments on credit cards and loans increasing, those more likely to shop around for borrowing products are, as expected, from higher income groups who typically are more welcoming of the base rate rise – 61% of those earning more than £40,000 a year are likely to shop around for a better deal on borrowing. This has particular consequences for finance providers, who ultimately will need to play more savvy in the coming months at welcoming new or returning customers with attractive deals.