(Bloomberg) -- Bank of England rate-setter Megan Greene warned that it will take time for UK consumer spending to recover, as many mortgage holders will be stuck with high borrowing costs.
Greene said on Thursday there is a “stark difference” between the behavior of consumers on both sides of the Atlantic since the end of the pandemic, with a surge in spending in the US yet to be seen in continental Europe and the UK.
Interest-rate cuts increase incentives to spend rather than save, she told a Financial Times event. However, many mortgage holders are locked in at higher rates after signing fixed-rate deals or face a sharp increase in costs when they refinance cheap deals taken before inflation took off. These types of mortgages dominate the market in Britain, typically for two or five-year terms.
It suggests that tepid consumer spending will continue to weigh on the stagnant UK economy, giving the BOE a balancing act between supporting growth and seeing off the threat from inflation.
“Given the structure of the UK mortgage market in particular, I think consumption will take a while to recover, even as rates are coming down just because of the fixed terms of UK mortgages,” she said during a panel discussion.
“I think there could be weak consumption for a while in UK and also across Europe, whereas the US consumer just seems to see no bounds,” she added.
Recent analysis from the BOE suggests that many households will see their finances squeezed by high borrowing costs for some time to come. The BOE’s Financial Stability Report in November warned that around half of mortgage borrowers will refinance at higher rates over the next three years. Just a quarter will benefit from lower rates.
Greene is seen as one of the more hawkish voices on the nine-member Monetary Policy Committee. While she joined the majority in voting for a rate cut in November, she has since pressed the case for a cautious approach to further reductions.
She warned on Thursday that UK inflation may remain above the 2% target in the medium-term as it is becoming “fundamentally more persistent.”
“Services inflation, in particular, has remained stubbornly high,” Greene said. “That’s underpinned mostly by wage growth. Wage growth has been coming down as well, but not as quickly as I would have liked.”
The BOE has told investors to expect a “gradual” cutting cycle, amid lingering uncertainty over the UK budget’s impact and the return of Donald Trump as US president.
Earlier this week, BOE Governor Andrew Bailey hinted that officials are on course for four quarter-point cuts next year after a faster-than-expected fall in inflation.
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