Retail's warm spell to end next month, CBI tells Bank

Richard Lambert, the new head of the CBI, warned the Bank of England against an immediate rise in interest rates after the employers' organisation put a summer surge in consumer spending down to the one-off factors of the World Cup and the heatwave.

Mr Lambert, a member of the Bank's monetary policy committee until March, said Threadneedle Street should adopt a "wait-and-see" approach and increase the cost of borrowing from its current 4.5% only if further inflationary pressures emerged.

In his first public appearance as director general of the CBI, Mr Lambert made his remarks as he presented his organisation's monthly snapshot of activity in the high street. It showed that 44% of retailers said sales were higher than a year ago and 37% said they were lower.

The survey was much more positive than those in the first few months of 2006, when more retailers were reporting a drop in business than were recording an increase. The CBI said, however, that the improvement was patchy and was concentrated in a handful of sectors.

"Retailers have had an encouraging four months of consecutive growth and it is pleasing that, despite England's quarter-final exit, the World Cup continued to boost the high street over the first half of July," Mr Lambert said.

"As World Cup euphoria fades so may sales, with retailers expecting sales growth to moderate in August. This fits in with the broader outlook as consumers are still under pressure. Wage increases remain modest while unemployment is rising. Escalating fuel costs and higher household bills are also eating into disposable income."

The CBI's director general warned of the damaging effect of any change in interest rates on consumer confidence but did not rule out the need for the Bank to act over the coming months.

"The Bank should be in no hurry to tighten monetary policy at this stage. It's possible that if fresh inflationary pressures emerge that a modest increase in rates may be appropriate but I don't think it's needed now."

Although high energy costs had pushed inflation above the government's 2% target, Mr Lambert said they were also affecting the spending power of consumers and forcing businesses to trim their profit margins. With unemployment rising, there was remarkably little pressure on wage increases from higher fuel bills.

The CBI's distributive trades survey showed that the spring upturn in retail spending continued into July, though at a slightly weaker pace than in June. Grocers and electrical goods retailers fared particularly well, with the World Cup boosting demand for food, drink and flatscreen TVs. Sales were also affected by the hot weather, which is likely to have been one of the factors pushing up supermarket sales, and for chemists, where there was strong demand for suntan lotion and remedies for hay fever.

A month watching the World Cup left little time for DIY, according to the CBI. It said the worst-performing retail sectors last month were hardware, china and DIY, together with furniture and carpets.

The CBI also sounded a note of caution about the UK business climate in general. British firms could find it difficult to invest, with rising pressure on profit margins due to energy costs, pensions and the tax burden.

Mr Lambert was particularly emphatic on the impact of the latter. "The current levels of corporation tax are unsustainable," he said. "Either the government will cut them or companies will make profits outside the UK."