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R-word looms as retail sales slump

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Exactly one year since the credit crunch started retail sales have shown their biggest fall on record in Britain, news that is likely to spur recession talk among consumers, who are already feeling the pinch from rising fuel and food costs.

For sure, the 3.9 percent drop in June was much worse than expected – economists had forecast a 2.5 percent decline – but shop prices are still higher than a year ago and the retail sales data series is notoriously volatile.retail-salessmaller.jpg

That might be enough to maintain interest rates on hold for now. The hawks among the Bank of England policymakers will find reason to remain cautious, no matter whether commentators are fretting that a combination of rising commodity prices, slowing house prices and falling consumer spending may push Britain into recession later this year or in 2009.

Recent minutes from the monthly meeting showed policymakers remain divided over the future path of interest rates as their opinions were split over whether the main threat to the economy comes from the slowdown in spending or from the spectre of rising inflation.

“Hoodie” of financial world continues to lurk

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cash2.jpgBorrowers might be under the cosh, but savers have never had it so good. Historically, when the Bank of England (BoE) base rate changes, mortgage and savings rates follow suit. But amidst the current credit crunch, those with spare cash and prepared to move their money around can take advantage of banks’ and building societies’ eagerness to attract retail funds.

The last time the base rate stood at its current level of 5 percent was 17 months ago — in November 2006. And there are huge differences between then and now in fixed savings rates. The top six-month fixed rate bond is now paying 1.59 percent more interest on a 10,000 pound investment, at 6.86 percent. Kaupthing Edge and Icesave top the best buy tables with that rate, Heritable Bank is close behind with its new offering of 6.80 per cent as of this weekend, and Alliance & Leicester this week issued a fixed rate bond with a competitive 6.83 percent. “With many people thinking  that the base rate is likely to fall further this year some of the fixed rate products available now look outstanding value,” says David Black, principal consultant for banking at financial research company Defaqto.

Interest rate cut too little, too late?

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houses2.jpgThursday’s cut in interest rates should come as some relief to hard-pressed borrowers, under the cosh from the credit squeeze which has seen lenders raise their rates, cut maximum loan-to-values and tighten lending criteria. Those on tracker rates – that mirror movements in the base rate – will, of course, see a reduction in the amount of interest they pay. Others, though, are at the mercy of their lenders.

A string of high-street names said they’d reduce their standard variable rates following the quarter-point Bank of England (BoE) base rate reduction to 5 percent. That, however, will only partially offset hikes imposed by many of these very lenders in recent times and many commentators argue that the Monetary Policy Committee has failed to go far enough to ease the pain in the mortgage market — and should have acted faster by cutting rates by 0.5 percent.

Was a quarter point cut enough?

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bank.jpgThe Bank of England has responded to the credit crunch by cutting interest rates by one quarter of a point to five percent, the third cut in five months.

It acknowledges the risks of stoking inflation but says the availability of credit seems to be worsening.

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