Call for rate cut as sales burst peters out

Retailers today call on the Bank of England to cut interest rates this week after the latest snapshot of consumer activity showed the burst of spending in the new year sales petered out by the end of January. With the Bank's nine-strong monetary policy committee due to begin a two-day meeting tomorrow, the British Retail Consortium said the underlying trend in sales was flat and the business climate challenging.

This morning's BRC report follows news from the Society of Motor Manufacturers and Traders yesterday that new car sales were more than 13% lower last month than in January last year. Kevin Hawkins, director-general of the BRC, said: "After the pre-Christmas upturn, we are now back to the reality of a tough, discount-driven retail market. The message from every sector of our industry is the same. The squeeze on consumer spending continues unabated. The economy badly needs a cut in interest rates."

Activity in shops and stores showed signs of recovery following the Bank's August quarter-point cut in rates to 4.5%, but according to the report, retail sales were only 0.2% higher last month than in January 2005 once increases in floor space were taken into account. The unadjusted figures showed an annual rise of 3.4%.

The BRC said sales fell back "significantly" after clearance sales at the beginning of the month. Food sales declined after a Christmas surge, while clothing and footwear also dropped back. Home and leisure sales were reported as "difficult", and mainly discount-driven. In the music sector, a bad month was salvaged by the debut album by the Arctic Monkeys.

The SMMT said car sales last month were the weakest since January 1992 -when the economy was in recession - but said the size of the fall was exaggerated by the ending of a tax break for diesel-powered company cars at the end of December. As a result, some sales were pulled forward from January into December.

Alan Castle, economist at Lehman Brothers, said that even allowing for the special factor, there was evidence of further softness in demand. Sales to the private motorist were down 9.2% year on year, the 22nd successive month in which the SMMT had recorded an annual decline. "Looking ahead, this supports our view that, despite the apparent rebound in retail sales over the Christmas period, broader consumer spending will remain soft."