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Last Updated: Sunday, 12 August 2007, 16:28 GMT 17:28 UK
Are you feeling bad enough yet?
By Anthony Reuben
Business Reporter, BBC News

Do you remember the "elusive feel-good factor"?

A man feeling bad
After five rate rises shouldn't you be feeling like this?

It cropped up a lot in the mid-1990s, as the then chancellor of the exchequer and the Bank of England wondered why their cuts in interest rates were not having the desired effect on spending on Britain's high streets.

Prime Minister John Major even blamed a lack of it for his government's unpopularity.

Now we may be seeing the opposite. Even though the Bank of England has raised interest rates five times in a year, people are not curbing their spending as much as perhaps they should.

The feel-bad factor may turn out to be elusive as well.

"For the majority of people in the economy there is still a bit of a feel-good factor, although that may be starting to diminish," says Richard Jeffrey from Ingenious Securities.

"For many of those people, the feel-good factor is a bit unrealistic at the moment and would probably be reduced without further action on interest rates."

Last week's stock market volatility may have upset people in the City, but consumer sentiment is rarely hit by movements on the share markets.

Crisis management

If consumers can still feel good after five rate rises, what can you do if you are a member of the Bank of England's Monetary Policy Committee (MPC) and you are trying to rein in spending by increasing the cost of borrowing?

Professor Willem Buiter from the London School of Economics used to have to take such decisions when he was a member of the MPC - he says that the problem is the length of time it takes for rate rises to have an effect.

"The lags are variable and uncertain and it's the unpredictability of the lags and the magnitude of the effects of monetary policy that make it difficult," he says.

"But that doesn't mean the central bank cannot do something effective at short notice should there be a real feel-bad factor and a financial crunch. For crisis management the lags can be very short indeed."

'Brown bounce'

The Bank of England is certainly not involved in crisis management at the moment and the surveys of consumer confidence reflect that.

Professor Willem Buiter taken by Nigel Stead, LSE
A lot of households don't know what's going to hit them until it hits them
Prof Willem Buiter

GfK NOP's report on consumer sentiment for July showed a slight fall, but that was mainly a correction, taking the score back to the level in April before the so-called "Brown bounce" - a rise in sentiment after Gordon Brown became prime minister in late June.

"There have been reports about the Brown Bounce," says Chris Davis from GfK NOP. "I think maybe the changing of the political guard has been a positive thing - people feel that the interest rate adjustments needed to happen and I think generally people think the government has things under control."

Nationwide's measure of consumer confidence actually rose in July, with failed terrorist attacks, flooding in the north of England and a rise in interest rates failing to rattle the British consumer.

Housing market

So is this the Blitz spirit? Or are we all deluding ourselves?

"Given the circumstances we would have expected consumer sentiment to be a bit worse than at the moment as the impact of interest rates take effect and people feel their disposable incomes eroding," says Chris Davis.

One of the striking things about the break-down of the GfK figures is that the index for people's expectations about their personal financial situation over the next 12 months gives a reading of +13, while the view of the general economic situation over the next 12 months gives a reading of -13.

That suggests that people think it will be quite a bad year for the economy but it will not affect them too much.

"A lot of households don't know what's going to hit them until it hits them, especially when it comes to outgoings or mortgages," says Prof Buiter.

"However, household finances in the UK still are pretty strong - remember there has not been a collapse of the housing market or even a decline."

Care needs to be taken when interpreting consumer confidence data, according to Fionnuala Earley, chief economist at Nationwide.

"We have to be a little bit careful with surveys of slightly fuzzy things like consumer confidence because it could be reflecting that things aren't as bad as they thought they might have been," she says.

Also, interest rates may not be the biggest economic influence on people's sentiment.

"The big factor underlying people's feelings about the economy are their feelings about the labour market - and we're not seeing anything there that suggests that the labour market is going to go into freefall and there are going to be big increases in unemployment," Ms Earley says.

Turning point

There is much discussion of how long the lag is before interest rate rises take effect, but many economists say that it takes about a year.

That means that the first of the five rises is just starting to take hold now, so we may be at the turning point before consumers do start feeling the pinch.

But at the moment, a sudden downturn seems unlikely.

"If the housing market were to tank in the UK the way it has in the US I think people would start worrying," says Prof Buiter.

"But objectively one would expect households not to feel too bad because things aren't too bad."

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