Market volatilty hasn’t crunched consumer confidence

Turbulent markets have failed to rock consumer confidence and may even have prompted a turn in optimism over interest rates, according to the latest Consumer Barometer from Lloyds TSB Corporate Markets.

In light of the recent market volatility, consumers may finally be convinced that the Bank of England will not need to raise interest rates further. The balance of those predicting higher rather than lower interest rates in 12 months’ time fell in August to a six-month low at 69 per cent from 74 per cent in July. Consumer opinion about interest rates is also likely to have been boosted by the news that CPI inflation fell below the Bank of England target last month to 1.9 per cent.

Optimism over interest rates and news of faster economic growth in the second quarter of this year helped to boost consumer feelings about their own job security in August. The balance of consumers feeling more rather than less secure in their jobs rebounded to 0 per cent up from -4 per cent in June and July.

But, despite this change in sentiment over interest rates and jobs, consumer expectations about prices remained steady. In August, the balance of consumers believing that prices went up rather than down in the last 12 months remained constant at 58 per cent. At the same time, the majority of consumers predicted inflation to rise by between 2.5-3 per cent in a year’s time.

Trevor Williams, chief economist, Lloyds TSB Corporate Markets, said: “The recent financial market volatility, coupled with July’s encouraging inflation figures, has prompted economists to reign in their interest rate expectations and it seems like consumers have followed suit. For the first time in six months we’ve seen a positive sign in consumer opinion that interest rates may finally have reached their peak in the current cycle.

“This change in sentiment, coupled with the boost from improved job security, suggests that the coming economic slowdown will be one that steers clear of recession, despite the fact that the full impact of the five interest rate rises so far has not yet been felt.”