Retail sales strengthened...while debate on interest rates set to become more heated - EY ITEM Club

21 May 2014

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  • Retail sales surge to strongest pace in ten years…
  • …with very strong growth in food spending
  • Signs that disagreement may be growing among the MPC

Martin Beck, senior economic adviser to the EY ITEM Club commented on today’s retail sales figures:

“Following a strong performance for retail sales in Q1, it looks like the momentum has strengthened even further into the second quarter. April’s growth was driven in part by food sales, which saw their best annual performance since January 2002. Furthermore, April’s expansion was broad-based, with all retail sub-sectors bar petrol seeing a rise in sales volumes. Admittedly, some of April’s strength reflected the timing of Easter, good weather and discounting by food retailers. But the three month-on three month growth rate was also the strongest since 2004.

“A healthy jobs market and high levels of consumer confidence have encouraged households to go out and shop. Yet the ingredient needed for truly sustainable growth – rising real pay – has so far been missing. Indications from pay surveys, however, suggest that a pick up may be forthcoming over the next few months. In any case, our expectation that growth in investment will continue to outpace rises in other parts of GDP means that the burden of maintaining the economy’s expansion won’t rest entirely on shoppers’ shoulders.

Martin added on MPC minutes:

“Meanwhile, the debate on interest rates looks set to become more heated. According to the latest minutes of the MPC, while the Committee remained unanimous in favour of keeping policy of hold, there were a variety of views on the appropriate path of monetary policy. For some members the decision to keep rates unchanged was becoming ‘more balanced’. That said, with prospects for inflation looking very benign and the economy, in our view, possessing a significant amount of spare capacity, we still think that a rate rise will not happen until well into 2015.

“But with emerging signs of disagreement in April’s meeting and Deputy Governor Charlie Bean’s speech last night that a rise in interest rates might be ‘the only game in town’ to deal with threats to financial stability, the risk that rates could rise sooner than we currently expect may have picked up a touch."