MPC unlikely to raise rates as underlying sales cool

Bargain-hunting consumers shrugged off the impact of higher interest rates and a weakening housing market to give a boost to spending in Britain's shops last month, the CBI said yesterday.

On the eve of today's meeting of the Bank of England's monetary policy committee, the latest snapshot of retailing from the employers' organisation reported a bounce back in activity during October.

However, City analysts predicted there was scant chance of the Bank raising rates when it announces its decision on borrowing costs tomorrow.

They cited separate data from the British Retail Consortium showing prices were down 1.37% in the year to October, the sharpest fall on record.

Mid-season sales for clothing and footwear, together with discounting of DVDs, videos and CDs were the main factors explaining the drop in prices, the BRC said. There were also special offers within furniture and furnishings, particularly on items for the kitchen and bedroom.

Kevin Hawkins, the director-general of the BRC said the lack of any inflationary pressure in retailing meant there was no need for the Bank to tighten monetary policy.

The CBI agreed, saying that sales over the latest three months were at their weakest for 18 months.

John Longworth, chairman of the CBI's distributive trades survey panel, said: "The period of strong spending seen up to the summer is over, with underlying sales growth cooling.

"An interest rate increase in November would be damaging and there is no need for the Bank of England to consider a further rise for the foreseeable future. Rates are either at their peak now or very close to it."

The CBI's monthly DTS reported that 37% of firms saw sales rise in October, while 26% saw them fall. The balance of +11 points compared with -9 in the September survey and +2 in August.

Retailers are now predicting growth at a balance of 12% this month, but regard their sales as below normal for the time of year, a change from earlier in the year when they were considered above normal.

Mark Richards of Lombard Street Research said: "The cumulative 1.25 percentage point rise in base rates has clearly had some effect, but only looks like achieving slight moderation in the pace of consumer spending growth.