U.K. Retail Stays Strong; Consumers Spend as Prices, Taxes, Interest Rates Fall

Consumer spending may be a stronger support for the U.K.'s economy than expected & money-supply boost might give stimulus measures enough time to work, Bank of England Monetary Policy Committee member Andrew Sentance said in an interview. The UK economy is in recession, having shrunk by 1.5% in 2008's 4th-Q & 0.7% in the 3rd. Official figures published Wed. showed that a drop in U.K. household spending was a large impetus behind that, falling at its fastest pace since 1991 in the last three months of 2008. But even while spending has fallen in many areas, the UK's retail sales have remained relatively strong. A survey by the Confederation of British Industry released Tues. recorded an improvement in sales volumes at UK. retailers. Retail sales rep about 30% of consumer spending. The rest incorporates expenditure on everything from education & health, to hotels and restaurants and the amount U.K. tourists spend abroad. "In general, consumer spending has played a stabilizing role in U.K. recessions. There are quite a few good reasons why we might expect that to be the case in the current environment," Dr. Sentance said. Those reasons include a boost in disposable incomes from the fall in energy and other commodity prices, a cut in sales tax & reduction in mortgage-interest payments as a result of interest-rate cuts. Inflation has decelerated, but less than many had forecast. Consumer-price inflation eased to 3% in January, having peaked at 5.2% in Sept. That compares with the euro zone, where the inflation rate fell to 1.1% in Jan. from a peak of 4.0% in July. One reason for the slight decline might be the pound's weakness. The pound fell about 26% against the dollar during 2008, raising price of imports. The BOE's long said it wants to see the UK economy rely more on exports & less on domestic consumer demand. But with the government's fiscal largess & central bank's sharp monetary easing, U.K. authorities may be standing in the way of that process. With its key interest rate at 1%, the 9-member MPC unanimously decided to ask for permission to boost the money supply through purchase of government bonds and other securities. The government and central bank are expected to release details this week on how the policy would be implemented. Increasing the money supply would help keep consumer and business confidence high enough to give the rate cuts and government stimulus measures time to work, said Sentance. At the same time, the BOE doesn't want to add too much fuel, leading to runaway inflation. "We'll be trying to make as measured a judgment as we can, recognizing this is a more uncertain area of policy," he said. Many analysts feel the ECB is behind the curve in fighting the downturn by not cutting interest rates quickly enough. The ECB is likely to lower its key rate to 1.5% from 2% next week, taking the policy rate to the lowest in the bank's 10-year history. But some policy makers have expressed reluctance to lower rates much further. ECB Governing Council member Axel Weber said a key rate "of 1% is for me the lowest limit," in an interview released Wednesday with German daily Die Welt. But Sentance praised the international policy response, saying he'd "put the risk in the other direction." "I would really want to draw attention to the fact wherever you look in the world there has generally been quite a strong policy response to the present situation, & that can only be helpful over the medium term for global economic growth. But we know that it takes time for those measures to feed through," he said.