The British and Mallorcan travel industry is worried about the impact a possible recession following the Bank of England’s outsized interest rate hike this week will have on summer holiday sales.
Industry sources have told the Bulletin that many Britons have been making a number of block bookings on websites which offer the option of last minute cancellation at no cost because they are worried about the cost of living crisis getting worse in the UK.
With rising interest rates likely to put more pressure on household spending, British holidaymakers are turning their back on Spain this summer, and could save £5,000 by visiting Cornwall instead, according to research from Parkdean Resorts.
Google searches for popular Spanish resorts have plummeted, with Malaga down 18% in the last three months, and Mallorca down 18% year-on-year, while searches for Cornwall are up 83% over three months, and 22% year-on-year.
And now, the sector is braced for a wave of cancellations. Britain's economy - which was hit by the shock of Brexit as well as the COVID-19 pandemic and the surge in gas prices caused by Russia's invasion of Ukraine - has dodged a widely expected recession so far in 2023.
But unlike most other big rich economies, output has barely recovered to pre-pandemic levels and growth this year looks set to be a minimal 0.25%, according to the BoE's forecasts.
Bank of England Governor Andrew Bailey said Thursday's rate rise was “absolutely imperative” to control inflation. “We’re not expecting, we’re not desiring a recession, but we will do what is necessary to bring inflation down to target,“ he said.
He said other countries were suffering too from “a pattern of persistent and rather sticky inflation”.
Last week, the European Central Bank raised rates by a quarter-point to 3.5%, and the Swiss and Norwegian central banks announced increases earlier on Thursday. All signalled there might be more tightening to come.
Bundesbank President Joachim Nagel described inflation as a “very greedy beast” on Wednesday, and the U.S. Federal Reserve Chair Jerome Powell said half a percentage point of further rate rises remained “a pretty good guess”, despite last week’s pause.
Bailey reiterated his view - unpopular with many politicians and trade unions - that current wage growth was unsustainable and he said businesses could not continue to keep raising prices at their current pace.
The BoE retained its previous guidance on future policy, saying further tightening in monetary policy would be required if there was evidence of more persistent pressures.
“The BoE has still made no attempt to set the stage for a pause in the rate hike cycle, which we have now seen from the U.S. Fed,“ said Henry Cook, senior economist at Japan’s MUFG.
The BoE said it would keep a close eye on the impact of higher rates on mortgage costs, as well as rising rental costs.
Official figures on Wednesday showed consumer price inflation was unchanged at 8.7% in May - although down from a peak of 11.1% last October - while underlying inflation rose to its highest since 1992.
Last month the central bank forecast that inflation would fall to just over 5% by the end of this year and be below its 2% target in early 2025.