The Bank of England monetary policy committee claims that savings levels in the UK are threatened by consumers' existing exposure to the stockmarket through with-profits and mutual funds because of market volatility.
The minutes of the last MPC meeting held on July 31 and August 1 say that higher levels of private pensions and equity-linked savings in the UK and US means that stockmarket volatility could dent consumer confidence. But the top economists who set BoE interest rates also say that consumption is still buoyed by the strength of the housing market.
They considered whether the troubles of pension schemes could lead to increased precautionary saving. Overall, the conclusion is that falling equity markets will reduce growth both of savings and consumption.
The minutes say: “The financial wealth of consumers in the UK compared with much of the rest of Europe was probably more sensitive to the price falls because of the greater exposure to equities through with-profits life insurance policies (including those embodied in endowment mortgages) and equity mutual funds. The committee expected only a modest rise in the UK saving ratio but acknowledged that recent asset price developments had increased uncertainty about this projection.”
Hargreaves Lansdown head of research Mark Dampier says: “I wonder how many people are aware of the equity component of with-profits? Reports about stockmarkets make people feel queasy without understanding exactly why. We are experiencing a client strike – they are not buying but they are not selling either.”