VRA members advised of spending slowdown by Bank of England

The Bank of England is battling to reduce inflation in the UK from the high and harmful levels it has reached in 2022, and members of the Vehicle Remarketing Association heard first hand about its methods this week.

Inflation is still rising – up to 11.1% from 9.6% in October and 8.8% in September, with costs of energy, fuel and imported goods all among the issues – and the BoE has to get it back under control to nearer its 2% target which allows for steady, controlled growth in the economy.

“It’s challenging times. High inflation, slow activity, but we’re going to get it back down to 2% - that’s our job,” Graeme Chaplin, Bank of England agent for West Midlands and Oxfordshire told delegates at the VRA Annual Seminar.

The BoE is trying to crack the question of what the right base interest rate is to start slowing down the economy. He said it’s a tough decision because they know the economy is going to slow next year but inflation remains high, so these are tough decisions.

The base rate, known as the Bank Rate, has already climbed to 3% this year from 0.1% in December 2021, and a further rise may be necessary.

“The market is currently expecting a Bank Rate of about 4.5% to 4.7%. So a slowdown is coming.”

Households will suffer a fall in real incomes over the next couple of years, he said. A crucial question for the Bank of England, and for motor retailers, is how much impact that will have on spending. The bank knows that the average household has built up savings during the pandemic and the unknown is how much of those savings they will be willing to spend to compensate for the shock to incomes. Equally, the recession may drive some households to save even more.

The Bank forecasts the unemployment rate climbing to around 6.5% over the next three years from the current 3.6% rate, which will also decrease consumer spending. The good news is that it will cause a slowdown of wage inflation.

Chaplin said the recession is expected to last 1.5 to 2 years, and although it will be shallower than the 2008 recession, it “can’t be sniffed at”.

A recent survey of used car retailers by Startline Motor Finance found one in two has become more pessimistic about their business opportunities as living costs impact on consumer behaviour.