Interest rate cut needed after poor Christmas sales but looks unlikely

08 January 2008 / by Rachael Stiles
Poor high street sales over Christmas have increased the pressure on the Bank of England to cut the base rate, but experts think that the current uncertainty of the financial climate will discourage a rate cut for at least another month.

According to sales figures, Christmas 2007 was the worst that the high street has seen for three years, with like-for-like sales rising by just 0.3 per cent in December – almost three times lower than even the bleakest pre-Christmas outlooks by the City.

Kevin Hawkins, Director General of the British Retail Consortium said: "This result is somewhat worse than we expected and points to a very challenging first half for 2008. Given that the full effects of the Bank's previous increases in interest rates have yet to be felt by many households, retailers and manufacturers alike need a rate cut now –preferably a full half-point."

Supermarkets were one of the only sectors to see a significant sales boost during the festive season, as people have continued to suffer the effects of the credit crunch which has caused higher mortgage repayments, and energy prices which are set to rise by a further 15 per cent.

Despite the negative figures, economists fear that the Bank of England will be discouraged from making a much-needed rate cut by fears of inflation which are being fuelled by record petrol prices and rising energy bills, which could see the Monetary Policy Committee delay a cut until February or March, rather than at the interest rate meeting which takes place this week.

Central banks have added further cause for concern regarding a rate cut, after voicing their fears of rising inflation as a result of soaring food and energy prices. Just 12 out of 63 economists surveyed by Reuters said that they expect a rate cut this week – the majority think that the MPC will postpone a rate cut until February, after the publication of its next inflation report.

Furthermore, despite the Bank of England cutting the interest rate for the first time in two years to 5.5 per cent in December, one in five mortgage providers have failed to pass on these savings to their customers as they struggle to meet repayments, which, before December's rate cut, had risen £135 a month compared to the previous year.

Just 18 of the 103 mortgage lenders mortgage lenders in the UK have cut their rates in line with the base rate, and 16 others have brought their rates down but not by the whole amount. In conjunction with lenders failing to make mortgage rate cuts, many banks and building societies have cut their savings rates by more than the 0.25 per cent cut in the base rate.

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