Sales surge signals rate rise

A MAY increase in interest rates was firmly back in prospect today following news of an unexpected surge in High Street spending.

Retail sales leapt by 0.6% in March, official figures showed - three times the increase City economists had expected. That meant sales in the first quarter were 6.6% higher than the same period a year ago - the fastest pace of increase for more than a year.

The news indicated that, contrary to recent speculation of a slowdown, the consumer spending boom remains in full swing.

Household goods stores, apparently benefiting from the property market boom, performed particularly well, with sales jumping by 0.9%. Clothes shops and shoe shops also had a good month.

Meanwhile, separate figures showed Britain's economy as a whole expanded by a solid 0.6% in the first quarter, less than the previous quarter's 0.9% and slightly below expectations as falling manufacturing output put the brakes on the economy. Nevertheless, the year-on-year rate of growth picked up to 3% - the fastest for more than three years.

A mixed bag of economic news over the past few days has clouded the outlook for interest rates. Rate doves took heart from news that inflation fell to just 1.1% in March, and only one member of the nine-strong Bank of England monetary policy committee voted for an immediate rate increase at its latest meeting.

But exceptionally strong mortgage lending figures yesterday and today's retail sales data have tipped the balance back to a likely rise in the cost of borrowing when the MPC meets on 6 May.

'With GDP growth at or slightly above trend, and with consumer spending showing absolutely no sign of the slowdown the Bank has long expected, rates need to rise,' said economist Adam Cole at Credit Agricole Indosuez. 'We see these figures as sealing the case for a quarter-point hike to 4.25% at the May MPC meeting.'

Ken Wattret at BNP Paribas also predicted a rate rise in May but said it was no longer a shoe-in. 'The meeting looks like being a far closer call than anticipated just a few weeks ago,' he said.

The pound spiked higher following the release of today's numbers but gilts and short sterling took them in their stride.

A breakdown of the GDP data highlighted the chronically unbalanced nature of the economy. The dominant services sector, which accounts for about 70% of total output, grew by 0.8% in the first quarter, while industrial production shrank by 0.5%.

But prices are tumbling

CONSUMERS may be splashing out in High Street stores, but they are refusing to tolerate increases in prices.

Shop prices in March were 1.5% lower than a year ago - the fastest rate of decline for more than a year.

The fall indicates that retailers are still struggling to find pricing power and profit margins remain under pressure.

Amanda Aldridge, head of retail at KPMG, said there had been widespread discounting, particularly in clothing and furniture.

'Retailers' margins are continually under pressure, and with talk of higher interest rates I can't see any let-up,' she said.

'Despite strong sales, this makes it a very tough environment for retailers in Britain's High Streets and shopping centres.'