Retail data to damp UK rate cut prospects

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Expectations that the Bank of England will embark on a raft of interest rate cuts are to be undermined by figures on Tuesday showing high street sales were stronger than expected in January.

The British Retail Consortium data follow Monday’s official report showing that the price of goods leaving British factories rose 5.7 per cent in the year to January – far exceeding market expectations and the highest annual rate of inflation since 1991.

Separately, trade figures showed import price inflation rose to 3.5 per cent in December, up from 1.9 per cent in November as sterling’s fall made foreign goods more expensive.

The producer price inflation figures saw money markets scale back forecasts of future interest rate cuts. Economists predicted that data due out Tuesday on consumer inflation, and Wednesday’s Bank of England quarterly inflation report, would also signal a slower pace of rate cuts.

Michael Saunders of Citigroup said: “The message will be that the Monetary Policy Committee do not expect to cut as far as markets project unless downside risks to the economy increase.”

That message will be reinforced if the British Retail Consortium figures prove a lasting guide to consumer sentiment. While confidence measures have fallen, shoppers still thronged to Britain’s high streets in January, the consortium’s figures showed.

Sales values were 4.9 per cent higher in January than a year before. Over the whole Christmas period sales were 3.7 per cent higher than a year earlier.

According to Helen Dickinson, head of retail at KPMG, the accountants, “the growth ... of sales was heavily skewed by a strong performance in week one, as January sales absorbed demand carried over from a poor December, which then deteriorated as the month progressed”.

The BRC said part of the increase in sales values came from food price increases, indicating that rising inflation is beginning to hit consumers.

Increasing inflation and signs of robust consumer spending will make the Bank much more cautious in cutting rates.

Geoffrey Dicks of the Royal Bank of Scotland said the figures “cast serious doubt on current market expectations for extensive, around 1 percentage point, rate cuts”.

Even if the Bank does cut rates, its own survey of mortgage lenders on Monday showed constraint in passing on its December rate reduction. At the end of January, new Bank rate tracker mortgages had higher quoted interest rates than in December. They were 0.2 percentage points higher than last June, when the Bank rate was also 5.5 per cent.

The squeeze on bank financing and caution in lending led to a rise in the quoted average price of two-year fixed mortgages since last summer even though the market price of funds has fallen. Buyers wanting to borrow 95 per cent of their home’s value were charged 6.41 per cent at the end of January compared with 6.26 per cent in June.

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