Retail sales and bank rate
Following this morning's retail sales data, UK newswire, Newspage, asked brokers what this could mean for the base rate. Their views can be found below.
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12 responses from the Newspage communityCopy all
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These strong sales volumes are without doubt great news for retailers, but not so much for the Monetary Policy Committee. The better-than-expected inflation data published on Wednesday gave some confidence to markets that rates may not reach the dizzy heights we all expected. However, such robust high street spending means all bets are off as to what this now means for interest rates. The rate-setters' decision has just been made a whole lot easier, and an increase of 0.5% is now likely at the next Monetary Policy Committee meeting in early August.
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People are still spending, which is great for retailers after a brutal few years, but the question is, how long will it last? When more people come off their ultra-low fixed rates, spending on the high street could hit a wall as mortgage payments skyrocket This better-than-expected retail sales data could pile further pain on borrowers since, with the economy seemingly rebounding, the Bank of England could unleash another hike in the base rate to control inflation. The repercussions of such a move would be far-reaching, causing borrowing costs for consumers and businesses to skyrocket.
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With this higher than expected spending on the high street, UK consumers may well have just bought themselves a bit more mortgage pain. The Bank of England faces a difficult decision at its next meeting after what has been a week of mixed data. On the one hand, inflation fell at a quicker pace than expected, which will likely make for a more dovish Bank of England, but this stronger than expected retail sales data could favour the hawks. The Bank of England will have a lot to think about on 3 August.
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A year ago, prices of fuels and energy were near their peak after the start of the war in Ukraine. Although the devastating war continues, things feel less uncertain for UK households. This has translated into more confidence and higher retail sales, pretty much across the board. We are comparing to a period of ultra-low confidence though, so this shouldn’t be seen as a sign the economy is thriving. This won’t push up prices, in fact prices on many items are starting to fall and that’s what the central bank should remember.
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This data is bittersweet for borrowers, as while it's great to see the economy more buoyant than expected, it could see the hawks gain the upper hand at the next Monetary Policy Committee meeting. It's a Catch-22 situation and hard to know how the Bank of England will respond to it. The Bank of England want to see indications that their rate hikes are proving effective. And while this week's announcement of inflation falling more than anticipated did just that, the retail sales data released on Friday doesn't contribute positively to a reducing rate environment.
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This is bad news for mortgage borrowers, with consumer-led inflation increasing. It shows there is still plenty of money sloshing around and people are still prepared to part with it. Expect further rate rises as the Bank of England seeks to nip this in the bud and their approach will become increasingly aggressive in their attempt to beat down stubborn inflation.
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This unfortunately won't help mortgage pricing, as this will be another reason to put base rate higher, as the whole objective of increasing rates is to slow down spending. However, this strategy does end up putting more money into the pockets of savers and pensioners, who in turn are immune from spiralling borrowing costs and will continue to spend on the high street. There are more savers than borrowers in the UK, but the borrowers will take the brunt of this.
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Whilst it is great to see the economic uplift shown by this morning's retail sales data, the concern is this implies to the Bank of England that there is still disposable income at levels to fund increased spending and posing a risk to their objective of reducing inflation. This could undo the positive effects of the recent inflation data and give cause to the Bank of England to continue their crusade on rising the base rate when they next meet on 3rd August.
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I fear that the proverbial can is being kicked down the road by many people. How is rising retail sales data possible during the highest inflationary period in decades? This could prompt caution from the Bank of England and further increases in the base rate. Borrowers beware.
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Friday's news showing June's retail sales grew by 0.7% might sound positive but actually complicates things when the Government is hoping for people to spend less. This is in sharp contrast to the inflation numbers we saw this week. Even with these stronger sales, we're not out of the woods yet when it comes to the overall economic picture. Many are predicting another Bank of England base rate increase soon. What we really need to watch out for is next month's core inflation. If it stays high, then it's likely mortgage rates won't be dropping any time soon.
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I don't think we'll see much of a reaction from the Bank of England to Friday's retail sales figures. The Monetary Policy Committee will be laser-focused on the latest inflation figures and I am still expecting to see an increase of 0.25% to the base rate in August. That seems like a proportionate response.
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Homeowners who were celebrating the fall in inflation earlier in the week could find themselves with their heads in their hands this morning as the retail sales data for June came in stronger than forecast. Millions of people who are already at the brink, if not past the brink, of affordability will be worried that the Bank of England will see this as proof that spending needs to be curbed even more. Raising the base rate again is not the solution, though, as it disproportionately affects the younger generation — the same generation that has already had to deal with an unprecedented global pandemic during their formative years.