A surge in retail sales in July has bolstered the City's confidence in the British recovery and cast more doubt over the credibility of the Bank of England's pledge to keep interest rates down for three years.
The Office for National Statistics (ONS) reported that retail sales rose 1.1 per cent last month, well ahead of the 0.6 per cent City consensus forecast. The rise prompted traders to bring forward the expected date of the next rise in Bank rate to just 18 months, sooner than the 24-month implicit forecast by the money markets earlier in the week.
Long-term market interest rates also spiked, with the yield on British 10-year gilts breaching 2.7 per cent, a two-year high. Traders are betting that strong growth and reductions in unemployment will compel the Bank to raise rates earlier than it presently plans.
British money markets rates were also strongly influenced by events in the US, where there were further signs of an improving job market. American state unemployment benefit claims dropped 15,000 to 320,000 last week, prompting traders to increase their bets on an imminent "taper" of the Federal Reserve's bond and mortgage-buying stimulus programme. This sent US 10-year treasury bond yields up above 2.8 per cent, also a two-year high. Treasury bonds and gilts have tended to move in tandem over the past decade.
The ONS said the retail sector, which accounts for some 20 per cent of the British economy, was given a lift by July's sunnier weather, with supermarkets, in particular, seeing more custom over the month.
Markit chief economist Chris Williamson said: "Shopping was most likely buoyed by the feelgood factor of the birth of the royal baby and [Andy] Murray's Wimbledon win, but it was the heatwave which was the most important in terms of boosting sales of outdoor goods, summer clothing, food and alcohol."
The positive retail figures follow ONS reports showing that house prices are rising and a return to growth in the beleaguered construction and manufacturing sectors.
Overall GDP grew by 0.6 per cent in the second quarter and economists are expecting an even quicker pace of expansion during the third quarter.
Last week the new Bank of England Governor, Mark Carney, said that he did not anticipate an increase in Bank rate from its historic low of 0.5 per cent until the second half of 2016. Any rises will be off the table until the unemployment rate drops from its present level of 7.8 per cent to 7 per cent.
Mr Carney added that the British economy had not yet achieved "escape velocity".
But those comments have had little apparent impact on rates.
UK 10-year gilt yields have gone up by some 20 basis points over the past week, representing a tightening of monetary conditions.
"The prospect of tapering in the US this September and a better run of economic data in the UK, causing the market to challenge the [Bank's] pledge to keep interest rates low for the next three years, are the key drivers of these movements," said Kathleen Brooks of Forex.com.
The nation's wealth tots up to £7.3trn
Rising house prices boosted the UK's total net worth to £7.3trn last year, the Office for National Statistics has said.
The £74bn increase on 2011 means the average wealth of the UK's 63.7 million population increased by £400 to £114,000, its latest figures on the national balance sheet showed. The average household's wealth also rose to £275,000.
Non-financial assets – mainly property, but also things like factories and machinery – increased in value by £225bn while financial assets such as loans held by banks – fell £150bn. The figures underlined the importance of property to the nation's wealth as its most valuable non-financial asset. The value of property, which accounts for 60 per cent of non-financial assets, soared £163bn to £4.4trn.
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