July 31, 2007 / 10:07 AM / 12 years ago

Consumer morale flags but sales hold up

LONDON (Reuters) - Consumer sentiment flagged this month but retail sales held up well, two separate surveys showed on Tuesday, leaving intact expectations for another interest rate rise this year albeit not this week.

A shopper in a file photo. Consumer confidence took a tumble this month as higher interest rates and the perception of a deteriorating economic backdrop encouraged people to save rather than spend, a survey showed on Tuesday. REUTERS/Vismedia

Research group GfK NOP’s consumer confidence barometer fell three points to -6 in July — its lowest since April, as higher borrowing costs and the perception of a deteriorating economic backdrop encouraged people to save rather than spend.

A survey by the Confederation of British Industry, however, suggested rising interest rates had failed to keep Britons out of the shops.

The CBI said its reported sales balance picked up to +18 this month from +17 in June, only slightly below retailers’ own expectations for a reading of +19.

Coming after surprisingly strong mortgage lending figures earlier this week, the figures indicate that five hikes in borrowing costs in less than a year have yet to make an impact on demand and rates may have to rise again to tame inflation.

None of the 61 analysts polled by Reuters expect the Bank of England to raise rates on Thursday, although a majority see a sixth quarter-point increase to 6 percent before the year is out.

“Consumer spending is still pretty healthy, and the apparent slowdown evident so far is unlikely to be sufficient to deter the Bank of England from raising interest rates again in the autumn,” said Howard Archer, economist at Global Insight.

“The BoE is keen to see a sustained slowdown in consumer spending in order to curtail retailers’ pricing power and ease pressure on capacity.”

WET WEATHER

The CBI made no mention of the soggy summer weather — Britain has had the most rain in the May-July period in nearly 250 years — but anecdotal evidence from retailers suggests the downpours have had divergent impacts on sales.

Home improvements retailer Kingfisher Plc, which owns the B&Q chain of DIY stores, said the wet weather hurt sales of garden furniture, dampening second-quarter underlying sales growth to less than half the rate in the first quarter.

By contrast, general retailer Woolworths said its sales were boosted by strong demand for DVDs and sweets as more Britons opted to stay out of the rain.

The CBI survey, conducted before the latest floods which devastated large areas of central and western England, did indicate that retailers are less optimistic about the outlook.

The underlying trend shows retail growth has slowed from the heady pace seen earlier in the year and retailers expect a further slowdown next month, with the expectations balance at +14, the lowest since January.

The savings index on the GfK survey, meanwhile, rose to its highest in nearly 20 years, a sign that consumers may start spending less in the coming months.

But policymakers have themselves said that signs of a slowdown have been tentative, and analysts reckon they will want to see more concrete evidence of weakening demand for reassurance that price pressures remain in check.

“We suspect this resilience will allow for a further hike this cycle as the BoE seeks to stymie UK firms’ well-flagged intentions to rebuild margins,” said Richard McGuire, strategist at RBC.

Additional reporting by Christina Fincher

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