An increase in interest rates would ‘hamper the recovery’ by further squeezing consumer spending, the British Retail Consortium (BRC) has warned today.
Tomorrow the Bank of England’s Monetary Policy Committee (MPC) will vote on whether to raise interest rates above the current 0.5 per cent level in order to push down inflation which has stubbornly stayed above government targets.
The MPC has resisted changing the national level of interest since March 2009 and Capital Economics is one commentator predicting that they will keep them constant again this month but more members of the group are said to be in favour of pushing them up.
Vicky Redwood, Senior Economist at Capital Economics, said: “Any additional pressure is hardly helpful at a time when the fiscal squeeze and rising inflation are already set to prompt real incomes to fall this year.”
Research published earlier this month by the BRC and research company Nielsen found that 27 per cent of people had no spare cash in the final quarter of 2010, and retail sales have already taken a hit in recent months due to diminishing consumer confidence.
Director General of the BRC Stephen Robertson has pointed to today’s shop price inflation report, which shows prices rising just 2.5 per cent despite pressures from global energy and commodity costs, as proof that the retail sector needs protecting.
Robertson said: “Raising rates at a time when consumer confidence is weak, the housing market is slowing and lending hasn’t revived would only undermine a very uncertain recovery.
“Inflation is not coming from the high street where competition is containing shop prices. The economy needs all the support it can get, especially in the light of negative GDP figures.
“Raising rates prematurely will hamper the recovery and damage retailers’ ability to invest, grow and create jobs.”
An increase of 25 base points is the likeliest amount that the MPC could raise rates by and that should not have a huge effect on household spending in the short term.
Some fear that one incremental increase will lead to several others and that pressures on consumers will become much more severe later in the year but Redwood argues that increases will at least have a more muted impact on incomes.
“We do not think that a modest rate rise would have a disastrous effect on household incomes, although the wider effects of a rate increase could be rather more damaging,” Redwood added.
“Rates could end up increasing several times this year (although we still expect that they will stay at 0.5 per cent). But even then, any increase would probably still be gradual.
“Even if rates got to 1.25 per cent by the end of this year, as markets expect, the dent to income would still be only 0.6 per cent or so.”