A rise in interest rates could dent consumer spending if introduced within the next six months, warns the KPMG/Ipsos Retail Think Tank.
The Retail Think Tank, which includes senior figures from KPMG, Barclays, ING and CBRE, believes that public confidence in the economy needs to rise significantly before interest rates are increased, or concerned consumers could reduce their spending.
This warning follows the latest retail sales data published by the BRC and KPMG, which revealed that consumers have already begun to cut back on big-ticket items like furniture, in anticipation of an interest rate rise.
Conlumino managing director Neil Saunders said: “The economy is getting stronger, but sentiment is lagging behind. People are worried about the timing and ferocity of a potential rise in interest rates. We are already seeing sales of some items decline as people formulate a contingency plan in case rates do go up this year.”
Zeus Capital retail consultant 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 foundations of confidence just aren’t there yet across many parts of the country”
David McCorquodale, KPMG
Unless wage growth picks up significantly and consumer confidence builds, the Retail Think Tank believes that a rise in interest rates this year could impact the retail recovery.
“The foundations of confidence just aren’t there yet across many parts of the country,” said KPMG head of retail David McCorquodale. “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.”
A 0.5% increase in the Bank Rate would increase the average consumer’s annual mortgage payment by £317. The fall in discretionary income that is likely to result from an interest rates rise could cement the shift to discount retail, especially in the grocery sector, according to The Retail Think Tank.
Barclays head of retail and wholesale Richard Lowe said: “Value retailers will benefit from a rise in rates, as people will inevitably look at their expenditure more carefully, especially those younger consumers who have mortgages and are feeling the pinch. Aldi and Lidl’s store roll-out programme will also extend their geographical reach and will mean that more people are able to shop with them.
“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.”