The Bank of England issued its first base interest rate rise in a decade earlier today, upping it to 0.5%.
The decision comes just over one year after the Bank cut interest rates to a new low of 0.25% in the wake of the Brexit vote, in an effort to stave off a possible recession.
The increase, intended to steady inflation, curb consumer borrowing and moderate economic growth, comes off the back of the robust health of the service and manufacturing industries.
Between them, the sectors account for the majority of the UK economy and their strength formed part of the rationale behind the rise.
By contrast, the retail sector is under intense pressure as consumer confidence, shaken after the Brexit vote, remains fragile amid global political uncertainty, while the shift towards experience-led spending and away from products presents both a challenge and opportunity for retailers.
So, how will today’s hike affect retail?
Consumer confidence and spending
Today’s hike is incremental and many observers maintain that it won’t make a material difference to consumers’ disposable incomes and spending habits.
“A small rebalancing of interest rates is unlikely to cause tremors for retailers as many consumers won’t feel an immediate impact from an increase in interest rates,” says HSBC’s head of retail James Sawley.
He adds that even consumers who are first-time buyers on tracker mortgages – the demographic most vulnerable to the rate rise – would only see their mortgage costs rise by around £15-£20 each month.
“The big issue is that sentiment may be affected because the rate’s grown for the first time in a decade”
Anthony Thompson, Fat Face
“It’s a squeeze of sorts, of course, but not at a level which would have a knock-on impact for retailers on the high street,” he suggests.
But other experts point to the psychological impact such an announcement might have on the consumer.
“I think the psychological impact of the phrase ‘interest rate rise’ will be enough [to affect consumer spending],” AlixPartners director Dan Coen argues.
“Trading was tough in September and, even if the rate rise is small, the consumer is so fragile. The timing of it is unhelpful to an industry that could do with having a bumper Christmas.”
Fat Face boss Anthony Thompson agrees that the impact on consumers may be emotional rather than material.
“The interest rate is still incredibly low,” he asserts. “But the big issue is that sentiment may be affected because the rate’s grown for the first time in a decade.
“I think there’s a potential for sentiment to be hardened [against discretionary spending] from a customer point of view but I think that’s already begun to an extent. Customers are already saying to us that they’re very considered with their purchases and need a reason to buy.”
The upcoming golden quarter is more crucial than ever this year, and some retailers are desperately in need of a good Christmas.
Theo Paphitis, founder of the eponymous Theo Paphitis Retail Group – comprising Boux Avenue, Robert Dyas and Ryman – believes that from an industry point of view while “interest rates going up is not necessarily a bad thing”, “it’s not good timing”.
“This way we get the rate rise and then have three weeks of waiting for the stimulus – the two should be taken into context together”
He believes Bank of England governor Mark Carney should have co-ordinated the rise with the economic stimuli expected in the upcoming Budget.
“We’ve got the Budget coming out later this month and there’s lots of things the Chancellor can do to stimulate the economy. The stimulus needs to come in at the same time [as the rise],” Paphitis says.
“It’s a bigger-picture thing and the messaging will be wrong. This way we get the rate rise and then have three weeks of waiting for the stimulus – the two should be taken into context together.
“I don’t think rate rises are the end of the world but we will be bearing the brunt of it for three weeks running up to Christmas before we get a stimulus.
“If we don’t get any stimulus to go with it that’s more bad news, but I think they should be announced together either way.”
The flip side of consumer sentiment and spending is the security and stability of retailers themselves.
As the retail environment continues to be challenging, some will worry about the impact the interest rate rise could have on their levels of debt, especially if it continues to go up.
“Retailers already struggling under excessive amounts of debt, operating in a market where profitability is under pressure”
“[This rise] is giving a statement of intent, clearly, from the Bank of England about what is likely to come in the future,” says Simon Evetts, managing director of management consultancy Alvarez & Marsal.
“If [rates continue to rise] there will be an impact on retailers who have significant levels of debt, which will be exposed to changes in the interest rate.
“Clearly, retailers already struggling under excessive amounts of debt – operating in a market where profitability is under pressure from a significant number of factors such as Brexit, exchange rates, consumer confidence, the shift to online and migration to leisure spend – will increasingly find themselves in trouble.
“We may see more retailers breaching banking covenants as a result and therefore getting themselves into financial trouble.”