High Street spree signals rate rise

THE prospect of an imminent rise in interest rates loomed large today following more upbeat news from Britain's High Streets and factories.

Speculation that the Bank of England will lift the cost of borrowing again next week was stoked by a CBI survey showing retail sales rising at the fastest rate for two years.

Meanwhile, manufacturing recovery stepped up a gear in May, according to a key barometer of the sector.

In the latest sign that consumers' appetite for spending remains has not been affected by three interest rate rises since November, the CBI said 51% of retailers reported higher sales in May than a year earlier, up sharply from April's 30% and the highest reading since April 2002. Growth is expected to be similarly strong in June.

John Longworth, chairman of the survey's panel, said: 'Strong consumer spending is fuelling the economy and this survey shows it is gathering momentum. Price promotions and warmer weather have contributed, but rising take-home pay, low unemployment and a strong housing market are the key drivers of consumers' willingness to spend.'

However, the survey also revealed that bumper sales are being achieved at the cost of heavy discounting. Rock-bottom prices are eating into retailers' margins and forcing them to cut costs, resulting in the biggest jobs cull since 1992.

Meanwhile, the closely- watched CIPS/Reuters purchasing managers' report showed the manufacturing sector expanded for the 11th month in a row in May.

The report's headline activity index registered 55.6, where a reading above 50 indicates expansion. That was up from 55.2 in April and is the highest since January.

After a long period of being unable to claw back rising input costs - chiefly commodities such as steel and crude oil - manufacturers appear to be recouping at least some of them, with factory gate prices rising at the fastest rate since 1999.

The report, which also revealed the biggest monthly employment gains since 1997, is likely to stir even more debate about the true health of manufacturing after official figures have claimed the sector is mired in recession.

Economists are split virtually down the middle on whether the Bank's monetary policy committee will raise rates when it meets next Thursday.

Howard Archer at Global Insight said: 'The case is becoming ever more compelling for the Bank to step up the pace of monetary tightening. A quarter-point hike in June, coming straight after a May tightening, looks increasingly likely.'