Retail recovery could spell rate rise

RETAILERS shrugged off their poor pre-Christmas performance in January to record a 0.9% rise in sales volumes, further increasing the likelihood of an interest rate rise.

Figures from the Office for National Statistics revealed sales hit their highest level since September last year, but at a cost of shops were forced to slash prices to stimulate sales.

The Bank of England said yesterday that consumer spending is key to the next movement in rates and any sharp rises in spending could trigger a rate increase.

The rise compares to a 1.1% fall in December as all retailers increased sales apart from chemists and sellers of books, cosmetics, medical and sports goods, computer and photographic equipment and other specialised non-food items.

Andrij Halushka, economist for the Centre of Business and Economic Research, said: 'Today's news may cause the UK stocks to rally on better than expected sales data. However, this may also mean higher interest rate expectations, depressing bond yields.'

Howard Archer, Chief UK Economist, Global Insight, wasn't convinced of an imminent rise, however. 'Retail sales rebounded reasonably well in January after disappointing in December, but the overall trend appears to be significantly softer compared to much of last year.'

He said the true strength of the Christmas/New Year period would not be known until Easter, making it unlikely the Bank of England will shift interest rates upwards next month.

Archer added: 'With consumer confidence picking up markedly in January, employment high, real wages growth picking up, interest rates set to peak at very low levels by past norms, and attractive prices still available on the high street, we expect consumer spending to be relatively resilient over the coming months.'

The average weekly value of retail sales in January was £4.3bn, 2.2% higher than January 2004 and 28.9% lower than in December.

Yesterday, the BoE said it expects consumer spending to continue growing at the same level of pace of the past three years. Governor Mervyn King said the outlook for the High Street remained 'uncertain'.