U.K. Retail Sales Drop as King Keeps Up Stimulus Push: Economy

U.K. retail sales unexpectedly fell in April, indicating continued weakness in consumer spending and supporting Bank of England Governor Mervyn King’s case to expand quantitative easing.

Sales including fuel declined 1.3 percent from March, the most in a year, the Office for National Statistics said today in London. A separate report showed Britain’s budget deficit widened from a year earlier. The pound fell to a four-week low against the euro.

While a drop in the inflation rate last month may ease pressure on consumers, King and two other Monetary Policy Committee members said slack in the labor market supports the case to increase bond purchases, according to the minutes of their May meeting published today. A majority voted to hold QE at 375 billion pounds ($566 billion) on concern an expansion could dislodge inflation expectations.

“We would not bank on an imminent reversal of April’s drop in retail sales volumes,” said Samuel Tombs, an economist at Capital Economics Ltd. in London. “Renewed signs of weakness in the economy will persuade the committee to press ahead with more QE before long.”

The pound weakened 0.6 percent against the euro and traded at 85.64 as of 11:42 a.m. London time. Sterling fell 0.4 percent versus the dollar to $1.5097.

IMF View

In a report on the U.K. today, the International Monetary Fund said Britain should stay focused on policies to foster growth and keep monetary policy loose, as it acknowledged some improvement in the country’s economic and fiscal situation.

It praised the government for showing flexibility in its fiscal program, though it said planned tightening will continue to act as a drag. It also said the BOE should consider providing guidance that interest rates will stay low.

Food sales plunged 4.1 percent in April, the most since May 2011, today’s retail report showed. Sales of clothing, textiles and footwear rose 0.8 percent last month, while household-goods stores saw sales increase 3.8 percent.

These figures are “notoriously volatile,” said Ross Walker, an economist at Royal Bank of Scotland Group Plc in London. Still, “these data serve as a reminder than the household sector is unlikely to lead any U.K. economic recovery.”

Deficit Widens

The budget data showed that the shortfall excluding temporary support for banks was 10.2 billion pounds in April compared with 8.9 billion pounds a year earlier. The figures exclude the transfer of 3.9 billion pounds of coupon cash from the BOE’s gilt holdings.

Excluding BOE coupon income, tax income was little changed in April on the year, with corporation tax falling 5.3 percent. Government spending rose 1.1 percent. Including the BOE cash, tax income rose 8.5 percent.

Six of the Bank of England’s nine policy makers voted against more stimulus this month because of the danger of stoking inflation expectations. While inflation slowed to 2.4 percent last month, the MPC said in the minutes that it is likely to pick up and hold above the 2 percent target for the next two years.

“There was tentative evidence that measures of medium-term inflation expectations were becoming more sensitive to short-term news in inflation,” the MPC majority said. “Financial markets were not expecting further asset purchases at this meeting and might, at the margin, reassess the committee’s tolerance of elevated inflation should additional stimulus be injected.”

U.K. Recovery

Separately today, a gauge of U.K. factory orders increased to minus 20 from minus 25 in April, which was the lowest reading since October 2010, the London-based Confederation of British Industry said. A measure of expectations for output over the next three months dropped 5 points to 18.

The BOE forecasts the economy will expand 0.5 percent this quarter after growth of 0.3 percent in the previous three months.

There are still risks to the recovery, including the tensions in the euro area, according to the central bank. Inflation continues to outpace wage growth and consumer confidence declined in April.

Next Plc, the U.K.’s second-largest clothing retailer, said this month it’s “cautious” because the “continuing decline in real earnings will depress discretionary spending for at least the next 18 months, if not longer.”

SNB Policy

Elsewhere, Swiss National Bank President Thomas Jordan said a shift of the cap on the franc and negative interest rates are among steps the central bank could take to prevent a tightening of monetary conditions. The franc weakened, breaking through

1.26 francs per euro for the first time since May 2011.

“The adjustment of the minimum exchange rate is something that principally belongs to the options if needed,” Jordan said. “We will maintain the minimum exchange rate for as long as necessary.”

In the U.S., Federal Reserve Bank of New York President William C. Dudley said policy makers will know in three to four months whether the economy is healthy enough to overcome budget cuts and allow the central bank to begin reducing stimulus.

“I don’t really understand very well how the tug-of-war between the fiscal drag and the improving economy are going to sort of work their way out,” Dudley said in an interview on Bloomberg Television. “Three or four months from now I think you’re going to have a much better sense of, is the economy healthy enough to overcome the fiscal drag or not.”

The Bank of Japan pledged today to adjust its unprecedented stimulus program as needed after a jump in bond yields that highlighted risks linked to policy makers’ campaign to revive the world’s third-largest economy.

BOJ Governor Haruhiko Kuroda said the central bank will conduct its debt purchases in a flexible manner, and that the recent volatility in government securities isn’t yet affecting the economy. He spoke after the BOJ board affirmed its plan to double the monetary base in two years as it seeks to end 15 years of entrenched deflation.