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Consumption and Interest Rates

In this speech, Professor Tim Besley, a member of the Monetary Policy Committee, considers the relationship between interest rates and consumer spending, and the factors that may determine how consumption evolves over the medium term. Professor Besley argues that there are a number of reasons why short-term disposable income changes explain changes in consumption. Access to credit is one such factor. He urges caution in assessing the link between house prices and consumption growth and cites evidence that 'consumption growth of renters is associated with house price growth just as strongly as the consumption growth of owners'. But there may be a role for housing collateral in affecting overall credit conditions available to households allowing them greater flexibility to smooth through fluctuations in their disposable income. He concludes that reading the trends in consumption in recent months and trying to form a judgment where things are going is fraught with difficulty. It is logical to expect some weakening of consumption growth to reflect the monetary tightening that has taken place. But there is considerable uncertainty about the speed at which this will happen and it could be some time before the data give us a clear picture of the trend.