Retailers gloomy as rate rises start to bite

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Improving weather has done nothing to improve the gloom on the high street as retailers said higher interest rates were beginning to bite.

The CBI yesterday reported steady sales growth in July, but said sentiment was downbeat.

While 42 per cent of retailers said sales volumes were higher than a year ago and just 24 per cent reported a decline, they said volumes for the time of year were below average despite summer discounting.

The positive balance of 18 is up from 17 in July and only a shade below the expected 19.

But confidence is low with just 13 per cent describing sales for the time of year as "good" compared to 30 per cent who said they were poor. The balance of minus 17 per cent is the weakest since April 2006 and far lower than retailers had expected.

The CBI said sales of big ticket items that are often bought on credit have been depressed in "stark contrast" to three months ago suggesting the Bank of England's interest rate rises are starting to hit consumer behaviour.

The CBI did not mention Britain's soggy summer in its report, but DIY retailers have said sales of products such as garden furniture have been hit.

Woolworths, however, said demand for indoor products such as DVDs had been strong. The retailer posted a better than expected 3.7 per cent rise in like-for-like sales for the eight weeks to 28 July yesterday, but chief executive Trevor Bish-Jones said he was "cautious" about the retail environment.

He also admitted comparative figures last year - when sales were hit by the World Cup - had been weak. Nonetheless, the shares picked up 2.5p to 25.5p despite Numis cutting its recommendation to reduce after voicing fears about margins.

Further evidence of trouble ahead came from GfK NOP's consumer confidence survey which took a tumble as higher rates and fears of a deteriorating economy encouraged people to save rather than spend.

The research group's consumer confidence barometer fell three points to -6 in July, its lowest since April and below forecasts for -4.

Component indices showed people were less inclined to make major purchases than at any time this year and were more inclined to save than at any time since the late 1980s.

Rachel Joy, from the group's consumer confidence team, said: "This month consumers are more downcast than we have seen in the last couple of months."

The figures came after surprisingly strong mortgage lending figures early this week, which suggested that the rate hikes have yet to have a serious impact on demand.

Rates are expected to remain on hold this week, although most analysts predict a further quarter point rise to 6 per cent before the end of the year.