Surge in retail sales adds to pressure on US interest rates

Chances of a further increase in US interest rates rose yesterday after data showed a surge in retail sales and wholesale prices, analysts said.

Government figures showed retail sales rose 0.4 per cent in March, and jumped 1.4 per cent when car sales were excluded. Figures for February were revised substantially higher. Annual growth in sales remains above 10 per cent.

Yesterday's figures came on the heels of a warning from the International Monetary Fund that there was a one in three chance the US economy would hit a recession next year. The IMF said that the US stock market, which it described as overvalued, posed a major threat to the global economy.

It also warned that mis-matched growth rates among the world's richest economies - with the US growing rapidly but Europe and Japan lagging behind - left the door open to volatile currency and capital movements and could throw the world economy into a sudden recession.

Michael Mussa, the International Monetary Fund's chief economic counsellor, said further US interest rate rises were needed.

"How much tightening is needed to slow down domestic growth is a big question mark, and there's an important question mark over a hard landing," he said.

The US economy grew at an annual pace of 7.3 per cent in the final quarter of 1999, and the Federal Reserve will be looking for a substantially slower pace this year. It has already raised interest rates five times since last June.

Earlier this week Laurence Meyer, one of the Fed governors, flagged the possibility of steeper rate increases unless the economy slows. He said there was an "unacceptable risk" of overheating.

Alan Greenspan, the chairman of the Federal Reserve Board, was less hawkish yesterday, saying there was no evidence of an inflation in underlying business costs. Other figures showed a 1 per cent surge in wholesale prices in March, mainly due to a jump in energy costs that was much steeper than expected. The core rate, excluding volatile food and energy prices, rose by just 0.1 per cent.