Bank may be surprised by retail figures, says CEBR

Friday, 21 January 2005 12:00 AM

The Governor of the Bank of England may need to reconsider his assertion that the Bank would not put too much weight on December's retail sales figures, according to an economic think-tank.

Retail sales figures, issued today, reveal a one per cent fall in December 2004 compared with the previous month - the largest December decline since 1981 at a time that is typically fruitful for retailers.

On Thursday Mervyn King told a CBI dinner there would be no rash reactions to poor retail sales over Christmas.

This had been taken as a signal that interest rates would remain on hold at 4.75 per cent at the Bank's Monetary Policy Committee meeting next month.

But the Centre for Economics and Business Research said that while the Bank had expected poor retail figures, it would not have expected a one per cent decline.

Such poor Christmas sales figures might prompt the Bank to cut the underlying rate of borrowing in the UK.

Elsewhere, the Council of Mortgage Lenders published figures pointing to a soft landing for the housing market, with the number of mortgage approvals stagnating at 84,000 compared to 83,000 the previous month.

According to CEBR economist Jonathan Said, this presented a problem for the Bank.

He said: "The Bank of England clearly expected poor retail figures. The question lies in whether it factored in such a significant decline.

"Today's figures will continue to put the Bank in a difficult situation. With inflation rising, the housing market heading for a soft landing and its success in curbing consumer borrowing, any inclination to accommodate poor retail figures with lower interest rates may weaken the Bank's current policy credibility."

Yesterday, Mervyn King said the MPC was more concerned with consumer spending over a longer time period.

"The true meaning of the Christmas story will not be revealed until Easter - or possibly much later," he said.

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