Rates and weather deter shoppers

The slowdown in spending will be good news for policy-makers

Higher interest rates and the cool summer weather have taken their toll on UK retail sales in August, according to the latest CBI trades survey.

Sales were up for 34% of firms, but 32% reported falling sales, resulting in a sales balance of plus 2%, much lower that the plus 24% reported in July.

This was the slowest sales performance since March 2003.

The figures suggest that the Bank of England's five rate hikes since November are beginning to bite.

Meanwhile, the underlying trend in retail sales growth, as measured by the three-monthly average, fell back to April's levels after peaking in mid-summer.

However, the CBI said those retailers questioned expected an improvement in September.

Rates impact

Sales of furniture and carpets were strong in August while clothing sales were flat due to weather factors.

If the Bank of England's strategy of gently slowing consumer spending is working, further rate rises could be put on hold Digby Jones, CBI director-general

Durable household goods, such as TVs and refrigerators, saw slower sales in August.

"It's true that the weather can influence shopping patterns but it seems more likely that consecutive interest rate rises are having an impact on spending," said CBI Director-General Digby Jones.

"If the Bank of England's strategy of gently slowing consumer spending is working, further rate rises could be put on hold."

The Bank has raised the cost of borrowing by a total of 1.25% to 4.75% since November.

Debt rising?

Concerns over consumer spending and subsequent debt levels were heightened last month after the amount of money owed by consumers broke through the symbolic £1 trillion barrier for the first time.

According to the Bank, consumers owed more than £1,000bn on cards, mortgages and loans, prompting it to raise base rates by another quarter point in August.

Though many analysts predict that rates will rise as high as 5.0% by the year-end, the latest CBI report might make the Bank think twice about another rate rise in September.

"Today's data provide further evidence that the recent series of interest rate increases are beginning to have some impact on the economy," said Simon Rubinsohn, chief economist with Gerrard.

"The retail reading is a poor one. The MPC is likely to be reasonably satisfied with these numbers and will almost certainly sit on its hands for at least the next two meetings."