High Street sales signal rate rise

A FEBRUARY increase in interest rates looked all-but inevitable today following official confirmation of a merry Christmas for retailers and a flourishing economic recovery.

Rubbishing reports of a miserable festive season on the High Street, the Office for National Statistics said retail sales jumped 0.9% in December - more than double the rise predicted by City economists.

That took the year-on-year rate of increase to 4%, implying a good, if unspectacular, Christmas by recent standards.

Meanwhile, the ONS also revealed that gross domestic product - a measure of overall economic activity - grew a better-than-expected 0.9% in the fourth quarter of last year. That took growth for 2003 as a whole to 2.1%, a whisker above the 2% forecast by Chancellor Gordon Brown in December's Pre-Budget Report.

The pound surged half a cent against the dollar, towards 11-year peaks above 1.85, and short-sterling futures plunged as dealers judged that an increase in the cost of borrowing in less than two weeks looked like a done deal.

A quarter-point increase in the base rate to 4% is now expected when the Bank of England's monetary policy committee meets on 4-5 February.

Economist Ross Walker at Royal Bank of Scotland said: 'Reports of Christmas gloom on the High Street were utterly unfounded. The acceleration in GDP growth further above trend significantly increases the chances of an interest rate hike on 5 February. Even sterling's renewed appreciation is unlikely to stand in the way of a rate rise after these data.'

Philip Shaw at Investec said: 'Overall the data are very firm and point to a strong likelihood of rates going up.'

The detail of today's report showed a strong retail performance across the board, with the exception of mail order. But there was evidence in the figures that retailers were forced to slash prices to shift stock. The so-called deflator - a measure of High Street inflation - fell to minus 1%, the lowest since last May.

Final-quarter GDP growth was driven entirely by the service sector. Production industries failed to expand at all, the latest example of Britain's chronically unbalanced economy and manufacturing's malaise.

Today's news rounds off a week of strong data on the economy - reports of unchanged inflation against expectations of a fall, a re-acceleration in mortgage lending and rapid Government spending growth.

It also emerged that Bank Deputy Governor Sir Andrew Large called for an immediate increase in rates at the MPC's meeting earlier this month.