Blog: Dean BestWill rate cuts calm retailers' fears?

Dean Best | 9 October 2008

The simultaneous rate cuts announced yesterday (9 October) stunned economic commentators and, arguably, gave some reassurance to the markets – but they also gave retailers exactly what they wanted.

It is hoped that the 0.5% cuts announced in London, New York, Frankfurt and Beijing, designed to free up the world's frozen banking system, will lighten the mood among cautious consumers concerned that a recession is here or, at the very least, imminent.

Inflationary pressures, certainly here in the UK, had hitherto discouraged the Bank of England from cutting rates and food inflation had been a critical element in its reluctance.

Retailers, facing plummeting confidence on the High Street, have been keen to see rates come down. Fierce price competition has hit margins, as has consumers' desire to trade down. However, with concerns over food inflation persisting, the Bank remained reluctant to cut rates.

In recent days, the UK's largest retailers have debated whether food inflation has at last peaked. Tesco boss Terry Leahy told Reuters last week that inflation had “passed its peak”. His comments followed the earlier insistence from Asda chief Andy Bond that “food price inflation has peaked and we are beginning to see the cost of goods stabilise”.

Both comments would have been made with a desire in mind for the Bank to cut rates and therefore get consumers spending again. And, yesterday, the British Retail Consortium published figures that, it claimed, showed food inflation was slowing.

Nevertheless, the debate over food inflation continues to rumble on. Yesterday, Sainsbury's finance chief Darren Shapland was more circumspect in his prediction for inflation. Meanwhile, Arla Foods has upped the price it will pay farmers for milk, while fellow dairy group Robert Wiseman has said it will also increase prices.

Whatever the industry debates, the average consumer remains pessimistic about the economic outlook – and that pessimism is only likely to be heightened with the latest warning on the global economy from the IMF.

And, for as long consumers remain downbeat, so retailers will find the margin growth of the recent past hard to come by.


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