UK Interest Rates Rise Could Slash Consumer Spending by £2bn

Almost £2bn will be wiped off consumer spending – a significant part of the UK economic recovery – if the Bank of England lifts its base rate by just half a percent.

That's according to a report by Conlumino, a retail sector analyst, which found in its June survey of 2,000 consumers that 56.9% believe interest rates will rise before the end of 2014, up by 13.6% on May's poll.

The economy is set to grow by 3% in 2014, according to Bank of England forecasts, as the recovery from the financial crisis solidifies. So the central bank is looking to hike its key rate from the all-time low of 0.5%.

Conlumino said a 0.5% increase would shave £1.877bn ($3.2bn, €2.36bn) off consumer spending as households with variable rate debt will have to funnel their finances towards higher monthly repayments.

Despite falling wages in real terms, as pay growth was outstripped by price inflation, consumers have continued to spend by eating into savings, helping to power the economic recovery.

"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.

"What's most worrying is that a rate rise could ultimately sap consumer spending. We are already seeing some early signs that consumers are less willing to commit to making big ticket purchases."

Mark Carney, governor of the Bank of England, said in his annual Mansion House speech that rates may rise sooner than markets were expecting. The consensus had been for around mid-2015.

But he and other Bank of England policymakers have repeatedly said they will only lift rates gradually to fend of the threat of any interest rate shocks.