Wed | Oct 17, 2018

UK pound sinks after retail sales disappoint

Published:Friday | July 20, 2018 | 12:00 AM
A British 10-pound note is posed for photographs outside the Bank of England in the City of London, Thursday, September 14, 2017. (AP)

The British pound fell Thursday below US$1.30 for the first time in 10 months after disappointing retail sales news raised further questions over whether the Bank of England will raise interest rates next month.

In early afternoon trading Thursday, the pound was down 0.6 per cent at US$1.2992. That's the first time the currency has dipped below US$1.30 since September last year and is a clear signal that investors think a rate hike on August 2 may not be as nailed on as they might have thought.

The latest drop is due to the news that retail sales fell a monthly 0.5 per cent in June, against an anticipated 0.1 per cent rise. On top of other official data this week showing wage growth moderating and inflation holding steady instead of rising, there's a growing sense that the Bank of England's rate-setting body may hold fire - once again.

"Inflation, wage growth, and retail sales have all undershot expectations, which will give the Bank of England pause for thought," said Laith Khalaf, senior analyst at stockbrokers Hargreaves Lansdown.

Though there's growing uncertainty about whether the nine-member Monetary Policy Committee will sanction a quarter-point increase in the bank's benchmark rate to 0.75 per cent, financial markets are still positioned for a hike.

Many say that a failure to hike could undermine confidence in the bank's communications policy. After all, prior to the May meeting, Bank of England officials, including Governor Mark Carney, had indicated that an increase was likely. In the event, tepid first-quarter economic growth and a surprise fall in inflation put paid to that plan.

This time, rate-setters would have several reasons to explain a hike. Figures next week are set to show that United Kingdom economic growth in the second quarter accelerated from the modest 0.2 per cent recorded in the January to March period.

They can also point to the fact that wages are outstripping inflation, which should buoy the economy and stoke inflation somewhat, especially when unemployment is low. And inflation at 2.4 per cent remains above the Bank of England's target of two per cent.

The rate-setting panel could also argue that retail sales during June was hurt by a combination of hot weather and the soccer World Cup in Russia, in which England did better than anticipated. Though retailers may have benefited from the accompanying increase in food and drink sales, many potential shoppers may have opted to stay at home. And overall, retail sales in the second quarter weren't so bad, growing by 2.1 per cent from the previous quarter.

With so much Brexit uncertainty ahead of March's EU departure, the Bank of England may not have many more chances to raise interest rates in the coming months, especially if the prospect of a 'no-deal scenario' becomes more likely. Recent close votes in Parliament amid deep divides in the governing Conservative Party have led many to think that a deal may not materialise by this autumn.

Most economists think that the longer it takes to come up with a Brexit agreement, the more likely consumers and businesses will be cautious, to the detriment of the economy, further limiting the Bank of England's ability to raise rates.

"With increased talk about the possibility of 'no deal', this caution is only likely to increase," said James Smith, developed markets economist at ING.

- AP