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Chancellor urged to relax inflation targets

Retailers are calling for the Treasury to relax its targets on inflation to ease the pressure on the Bank of England so it can cut interest rates and boost consumer spending.

The Bank needs to hold interest rates at 5% to meet inflation targets set by the Treasury of 2%, but the rise in oil prices, food and the cost of housing have all eaten into household disposable income and without an interest rate cut retailers are set to bear the brunt.

The British Retail Consortium said it did not require a formal change but called for the Chancellor to give some leeway to the Bank.
It added: “Key contributors to high levels of inflation, such as world energy prices, are not affected by keeping UK interest rates high. The Bank should be stimulating the economy with interest rates, even if this means a slackening of inflation targets.”

Hobbs chief executive Nick Samuel said: “Cutting interest rates is exactly what they are doing in the US to avoid some of the consequences of the credit crunch. The fact that we’re suffering from increased oil prices means that the government ought to be pushing the economy, rather than cutting back.

The Treasury needs to abandon its target policy for 18 months, and the Bank needs to make further interest rate cuts this year.”

Adam Chester, chief economist at Bank of Scotland Treasury, said: “Retailers’ margins have been squeezed, they are at the forefront of a slowdown in growth, affected by import prices going up and the sterling falling. Retailers would normally pass on these costs, but the ability to pass on in the current climate is next to nil, because households don’t have the budget to pay for increases.”

Viyella chairman Robert Kimpton added: “There needs to be a narrower definition of the inflation target to encourage the Bank to drop interest rates, and stimulate consumer spending in the second half. What matters to retailers is what happens today.”

However, Chester added that retailers needed to sit tight and ride out what would be a “tough few years”. He said: “Consumers need to reign in their spending. There isn’t a quick fix solution.”

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