UK consumer sector slowdown larger than expected

The Bank of England chief has today admitted that the effect of the slowdown in the housing market on the consumer sector may have underestimated.

The Bank's Governor, Mervyn King, said that predictions in February by the Monetary Policy Committee, warning of weakness in household spending have "crystallized" to become more marked and have persisted into this year.

Inflation too, has also been stronger than expected, picking up to 1.9%.

Speaking yesterday, Mr King said: "In today's Report, the new central projection is for continuing steady growth with inflation remaining close to the 2% target throughout the forecast period. But the chances of the economy evolving exactly in line with our central projection are very small. So the real issue is the uncertainty about the outlook for inflation, where there are risks in both directions."

He said: "Profit warnings from a number of retailers, business surveys, reports from the high street, and the official data on retail sales all point to an easing of consumer spending. The evidence now suggests that the contribution of consumption to activity growth is lower than for some years. The Committee's central view is for household spending growth to recover, but to remain below the average of recent years."

However, the Bank of England said that GDP growth remained around trend, as the growth of the services sector, which represents around 70% of the economy, stayed firm.

But concern has been raised at a sharper than expected rise in inflation - inside six months inflation has risen from 1.1%; to hit 1.9%. Though the MPC's central projection is that inflation will remain close to the 2% target throughout the forecast period.

The MPC decided at its meeting on Monday to leave the interest rate unchanged at 4.75% for the ninth consecutive month.

Speculation over the economy figures indicates that with consumption set to fall, a rise in interest rates in the short term is unlikely.

(SP)