Scottish Widows' £5.8bn windfall raises spectre of inflationary spree

The £5.8bn payout to Scottish Widows policyholders as part of the takeover by Lloyds TSB could fuel a consumer spending spree and force up interest rates, economists warned yesterday.

The £5.8bn payout to Scottish Widows policyholders as part of the takeover by Lloyds TSB could fuel a consumer spending spree and force up interest rates, economists warned yesterday.

More than 1.6 billion Widows policyholders have started to receive cheques of up to £100,000 per person under the terms of the takeover of the mutual life assurer.

The Centre for Economics and Business Research said anecdotal evidence suggested recipients had been surprised by the level of the individual payouts.

Douglas McWilliams, CEBR chief executive, said this meant there had not been much spending in anticipation of the windfalls because people did not know much to expect. "It will gradually trickle into expenditure and ultimately something to close to a quarter of the money will be spent," he said.

"Along with a couple of other windfalls this money will work its way into spending and is one more reason to expect that we will see some more upward pressure on UK interest rates."

CEBR has a forecast for the peak for interest rates at 6.75 to 7 per cent, compared with 6 per cent now, partly due to the Scottish Widows windfall. This is at the top end of forecasts.

The Bank of England has made clear it believes that a slowdown in consumer spending, currently running at 4 per cent a year, is needed if interest rates are to stay on hold.

Research by the Bank at the time of the mass of building society demutualisations in 1997, which saw windfalls totalling £24bn, indicated it would boost consumption by 0.5 per cent based on up to 10 per cent of the gains being spent.

The Bank is cautiously optimistic about the impact on the economy this time around. Mervyn King, the Bank's deputy governor with responsibility for monetary stability, said recently that he was not overly concerned. "It is not a material risk but the Monetary Policy Committee will examine it. It is unlikely that wealth will rise as rapidly as it has in the recent past," he said. "Households will want to rebuild their balance sheets."

Scottish Widows has been encouraging its policyholders not to "waste the windfall", with special offers on long-term investments. All 1.6 million policyholders are eligible for a minimum of £500. Of these some 900,000 with-profits policyholders stand to gain much more. Payouts depend on the number of policies, the size of the contribution and the age of the policy.

Although there are 50,000 policyholders in and around Edinburgh, the majority of the client base is in southern England, which has been the engine of consumer spending growth and the centre of the recent surge in house prices.

The Land Registry will tomorrow publish figures for the second quarter, which are expected to reveal the levels of house price rises achieved over the summer. The market has since cooled sharply, however.