A member of the Bank of England’s Monetary Policy Committee has warned ‘under-saving’ could lead to disappointment in living standards later in life.

Martin Weale, an external member of the Monetary Policy Committee, said the UK had a poor savings record history.
 
He said there had been no ‘obvious tendency’ to save more in the 10-15 years preceding the financial crisis despite increasing life expectancy and the ‘baby boom’ generation coming of pension age.
 
Weale said, ‘Britain’s consumption needs are expected to rise in the future and, in the nearer term, saving is needed to make this possible.’
 
Without increased saving, Weale warned of an imbalance between resources and consumption.
 
‘This will create pressures to transfer resources from young people to old people reducing the consumption of the former to support the latter,' he said. ‘So either young people or old people will find that they cannot consume as much as they might hope.’

He added, ‘Restoring the savings relationship of the pre-crisis years would reduce the required fall in consumption by over three percentage points.

‘But such a cyclical improvement would come about only if income were to rise faster than consumption; it is unlikely that this could be generated by a purely consumer-led revival.’

Weale said an immediate hike in the pension age could also address the imbalance, but would still lead to a shortfall.

‘Since no-one expects working lives to rise to this extent in the short term it follows that a bigger increase will be needed in the long term. And we probably need to save more as well.’

In the wider global economy, Weale said the problems in the Eurozone could be more harmful to the UK if they intensify and warned of higher risks in the banking sector.

He said though weaker economic sentiment in the US would affect the UK, exports to the Eurozone represented a much larger proportion of GDP.

‘So it is a cause for concern that there was very little growth in the euro area in the second quarter and that leading indicators do not point to a revival underway,’ he said.

Weale said although the Eurozone sovereign debt crisis had not been helped by markets, borrowing limits had been abandoned by member countries.

According to Weale, the outcome of an undisciplined approach to borrowing had resulted in the market pushing up yields on countries with a higher risk of default.

Weale said the weaker economic outlook had prompted his decision to switch support for a base rate increase at the August meeting of the Monetary Policy Committee.

He said there had been also been some relief in the drop off in oil prices in recent weeks.

Weale added, ‘They could point to inflation lower than I had feared next year and to a substantially reduced risk of the sort of second-round effects on wages which have so concerned me over the last few months.’

However, he said there was ‘undoubtedly further scope’ for further quantitative easing to prevent inflation falling below the central bank’s target of 2 per cent.

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