Prospects of rate cut dashed after strong recovery in high street sales

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Shoppers embarked on a spending and borrowing spree last month, according to figures yesterday that delivered a fresh blow to those hoping for a cut in interest rates next month.

Retail sales grew at twice the expected pace, while estimates for August and July were revised up. Meanwhile, mortgage lending posted its biggest rise in nine months in September.

"The data revealed a somewhat more positive tone to high street spending," said Alan Castle, the UK economist at Lehman Brothers, who admitted he was close to "throwing in the towel" on a November rates cut.

But the gloss from the monthly improvement masked a slump in the growth rates of money passing through shop tills to the lowest level since the Second World War.

The volume of retail sales jumped by 0.7 per cent between August and September, more than double the 0.3 per cent that had been forecast by City economists, the Office for National Statistics (ONS) said. The growth was led by food stores, but all segments of the high street benefited with only mail order sales suffering a fall.

Meanwhile the ONS added 0.3 percentage points to growth in August and July, taking the estimate for the third quarter to 0.4 per cent.

The growth was won at the expense of retailers' profits as prices were 0.9 per cent lower than a year ago, indicating more savage price cutting than August's 0.6 per cent. Household goods stores cut prices by 1.5 per cent.

As a result, the total value of retail sales fell 0.1 per cent compared with September last year. This left the three-monthly annual growth rate - a better indicator of high street trends - at just 0.2 per cent, its lowest since modern records began in 1947.

Robert Prior-Wandesforde, a European economist at HSBC, said: "Before popping the champagne corks and declaring that the UK consumer is back, a sense of perspective is probably required here. A combination of subdued underlying demand and rocketing retail space is clearly putting a lot of downward pressure on prices and profits." He added: "The worry must be this will feed through into job losses."

Some analysts said even if the Bank left interest rates unchanged next month, the decline in the annual growth rate in retail sales to a nine-year low of 0.7 per cent pointed to the need for lower rates next year. Vicky Redwood, at Capital Economics, said: "If overall data retains its softer tone of late, rates will have to fall next year to about 3.5 per cent."

There was further upbeat news from the major high street banks, which said the volume of mortgage lending hit a nine-month high in September. The Council of Mortgage Lenders said gross mortgage lending rose to £28.1bn in September from £26.9bn in August to reach its highest level since July 2004.

Michael Coogan, the director general of the council, said: 'The housing market is in relatively good health and households are not lacking confidence to take on mortgages."