Bank urged to ignore spending spree

The Bank of England must keep interest rates on hold when it meets later today despite an unprecedented rebound in high street spending, according to the CBI.

Fresh data from the group's survey shows retail sales rose more than expected in October and at their sharpest rate for three months.

Those traders reporting a decline in activity accounted for just 26 per cent of respondents, compared to 37 per cent enjoying better business.

However, the CBI said such evidence should be treated with caution as the underlying trend was still downwards while growth remained below normal.

Factors such as low inflationary pressure in retail, higher energy costs and falling house price inflation mean the Bank should decide rates are frozen, it said.

A survey by the British Retail Consortium meanwhile shows retailers cut their prices in October by the highest amount for seven years last month.

Some say this is the real cause of the depth in retail sales as retailers adjust their prices in the run up to the Christmas period.

Economists predict such mixed messages will prompt the Monetary Policy Committee not to increase rates for November.

John Longworth, chairman of the CBI's distributive trades 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 to a further rise for the foreseeable future. Rates are either at their peak now or very close to it."

He added that "a great deal of uncertainty" remains for the economic cycle and suggested consumer spending over the next few months would be unpredictable.

Support for the CBI as well as economists has emerged from the Trade Union Congress, who have called on the Bank's committee to signal rates have peaked.

Ian Brinkley, chief economist at the TUC, said: "There is no economic rationale for further increases in interest rates, which should now be frozen.

"With sign that house prices are falling and the manufacturing sector sluggish, additional rate rises would be unnecessary and damaging."

Yet accountants BDO Stoy Hayward warned that rates could rise to 5 per cent despite the economy's "soft patch."

Peter Hemington, a partner at the firm, said the UK should not start celebrating because rates could well increase in the New Year.

Separately, the housing market looks to have taken its toll on sellers with a Nationwide survey revealing 'doom and gloom' attitudes towards the recent slump.

The survey found one in six households expects the value of the their home to drop, a notable increase on the one in ten worried about the fall some eight weeks ago.

 

4th November 2004

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