Wed, Jun 29, 2022 @ 15:53 GMT
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Jump In UK Retail Sales Adds To Rate Hike Expectations, Pound Tests $1.36 Again

After a notable slowdown at the end of 2016 and start of 2017, British retail sales are showing some signs of recovery, even as consumers continue to feel the pinch from falling real incomes. The volume of retail sales jumped by 1% month-on-month in August, the most in four months and surpassing expectations of 0.2%. On a 12-month basis, retail sales rose by 2.4%, beating expectations of 1.1%.

Adding to the upbeat data were an upward revision to the prior month’s numbers. July’s month-on-month figure of 0.3% was doubled to 0.6% and the annual rate was revised up from 1.3% to 1.4%. Excluding fuel, retail sales were up by a similar 1% m/m.

The growth was driven by sales from non-food stores and online retailers. Food sales were flat year-on-year in August even though the value spent rose by 2.6%, underlining the increase in prices generated by sterling’s depreciation. The biggest price gains were recorded by clothing and fuel stores. Clothing stores enjoyed increased sales of 3.4% despite the higher prices but fuel sales declined by 1.1% over the year.

The data will likely allay fears for Bank of England policymakers that consumer spending is heading for a sharp slowdown and may even be rebounding following three straight months of gains. Until recently, investors were not convinced by the Bank of England’s more hawkish tone since June due to declining consumer and business confidence. With the Brexit negotiations not getting off to a strong start and lingering uncertainty about Theresa May’s premiership, many analysts had expected the Bank to hold off from raising rates until more clarity emerged on Britain’s post-Brexit relationship with the European Union.

However, following the BoE’s September policy meeting last week, odds of a quarter-point rate hike by as early as the November meeting have surged. The Bank signalled that a majority of MPC members would be in favour of raising rates “over the coming months” if the economy and price pressures continue to grow. The pound subsequently rallied to a 15-month high of 1.3618 against the dollar and a two-month high of 0.8772 to the euro.

Sterling attempted to climb back towards those highs after today’s data, hitting session tops of $1.3607 and 0.8824 pounds per euro. Political uncertainty ahead of Friday’s big speech on Brexit by Prime Minister May in Florence, Italy, will likely prevent fresh highs for sterling, while Governor Mark Carney’s remarks on Monday that any tightening in policy would “gradual” and “limited” has also been weighing on the British currency.

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