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Early interest rate hikes could hit retail growth, think tank warns

An interest rate increase within the next six months could knock consumer confidence setting back retail growth, a report warned today.  

The timing of a rise is crucial if shoppers are to have the confidence to continue to spend, according to the KPMG/Ipsos Retail Think Tank.

The Bank of England is expected to announce an interest rate increase from the current level of 0.5% in late 2014 or early 2015. Bank of England deputy governor Ben Broadbent has said there is also “an argument” for an earlier rate rise.

The research group – which includes senior figures from Barclays, ING and CBRE – said public confidence in the economy and wage growth needs to “rise significantly” before interest rates are increased, otherwise concerned consumers will cut back on their spending.

Retail analyst and think tank member Nick Bubb said: “For some consumers, who have relied on there not being an increase in rates before the election next year, the first rise will come as a shock. And a rise in November will not be obviously helpful to uninhibited consumer spending at Christmas.”

The report came on the same day it was announced that shop prices fell for the 15th consecutive month in July, as retailers maintained high levels of discounting and promotions to attract summer shoppers.

“The foundations of confidence just aren’t there yet across many parts of the country,” said David McCorquodale, head of retail at KPMG. “If the rate rise comes at a time when the average UK consumer is not ready for it, then it could be damaging to the retail sector. But if rates rise just as the economy begins to purr then it won’t hurt retailers as much, because other factors such as wage inflation will offset the rise both financially and emotionally.” 

Some retailers are set to benefit from a future rise in interest rates, with an increase expected to cement the current shift towards value and discount retailers, the think tank suggested. Richard Lowe, Barclays’ managing director and co-head of the London region, said: “In general, retailers might want to look more closely at their value for money proposition and promotional activity to ensure single digit growth this year and beyond.” 

The think tank said a rise in interest rates is unlikely to trigger a raft of retail insolvencies, as most retailers have paid down debt over the last five years and lending levels have fallen to more reasonable levels.

McCorquodale said: “Many retailers pre-recession had high levels of debt, partly to support private equity funding structures. Most have managed their debts down to serviceable levels but an increase in the borrowing costs for those retailers will put additional strain on their operating models – the same can be said for their suppliers.

“I do not predict a deluge of administrations but, perversely, growth can have its own strains, especially around working capital. Retailers will wish to ensure that they and their suppliers are able to navigate their way to recovery. Many retailers are exploring supply chain finance to support their suppliers through this change.”

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