Shoppers deterred by interest rate rises, say retailers

Retailers today responded to sluggish activity in the shops last month by warning the Bank of England against any further increases in the cost of borrowing.

The British Retail Consortium said the Bank's attempt to cool down house-price inflation was having "unnecessary and unwanted" effects and that the fragility of the consumer would be exposed by fresh rises in interest rates.

Only deep discounting in the summer sales ensured modest sales growth last month, the BRC said, as the City awaited clues as to the Bank's interest-rate strategy from the release of tomorrow's quarterly inflation report.

Analysts said evidence of stronger inflationary pressures in manufacturing would add to concern on the Bank's nine-strong monetary policy committee that robust demand in the first half of 2004 was feeding through into higher prices of goods leaving the factory gate.

Government data released yesterday showed that the core measure of industry's output prices - excluding food, tobacco, beverages and petroleum products - rose by 1.6% in the year to July, the fastest annual rate in eight years. In July alone, the index of producer prices from the Office for National Statistics rose by 0.3%, the largest monthly jump since summer, 1995.

John Butler, UK economist at HSBC, said manufacturers were seeking to pass on higher costs to their customers. "It is questionable whether this can be sustained, particularly given the persistently high level of sterling and competition from cheaper imports.

"Nonetheless, the MPC may be a little concerned that retailers [will] try to push through these higher costs."

The BRC said retailers were in no position to pass on higher prices to shoppers, given that the 1.8% increase in like-for-like sales on July 2003 had been dominated by bargain offers.

"Sales growth slowed in July and the impact of the series of interest rate rises in dampen ing consumer confidence is beginning to become clear", said Kevin Hawkins, the BRC's director general.

"Demand is sluggish and most growth is being driven by promotion, which is why the impact of unseasonable weather was amplified. The monetary policy committee's desire to target house prices is already having unnecessary and unwanted consequences on the high street. "