WHAT makes the outlook worse for retailers is the likely direction of interest rates. According to the Council of Mortgage Lenders, the amount extended to families in home loans is ballooning, and Lombard Street Research, the only major forecaster to predict this year's 10pc increase in house prices, now thinks property inflation could hit 15pc in 2007.
All of this makes it more likely than not that the Bank of England will hike interest rates to 5.25pc early next year. Another increase on top of that could yet be in the offing later in the year. Rates at 5.5pc still depend, however, on whether the US slows and drags us down with it.
But with pounds 1,300bn of household debt to be paid for as well, this means consumer spending is almost certain to be trimmed - at the very least.
I don't doubt the Bank of England raising rates will have some restraining effect on consumer behaviour but there are other equally important powers at play that will determine the direction of the economy.
The truth of the matter is that changes in interest rates have less of an effect in terms of steering the economy than they did previously.
There are a couple of reasons why. First and most importantly, the levels of borrowing rates available to institutions, and by extension consumers, are dependent more on the international money markets than the Bank of England's base rate.
Simply put, globalisation, and the phenomenal flow of cash from one side of the world to the other, means the effect mere central banks have on market rates are greatly diminished compared with even five years ago.
Secondly, as Peter Spencer from the Ernst & Young Item Club points out, the fact that the public sector is now responsible for such a massive chunk of gross domestic product, it is fiscal rather than monetary policy which is having a major impact on growth and, to a lesser degree, inflation.
If you're looking for an example, remember the fact that when the housing market suddenly lost steam back in late 2004, the spark wasn't the fact that interest rates were raised to 4.75pc, but because Governor Mervyn King explicitly warned about a possible house price crash.
Given that prices have soared since then, the public is unlikely to take quite so much notice if he tries again.
What will really put paid to the consumer debt boom is when lenders to both households and companies finally realise that the economy's future is rather more rocky than anticipated, and turn off the credit tap.
Source: Damian Reece, The Daily Telegraph
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