Surge in retail sales points to rate rise

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The Independent Online

Retail sales grew much more strongly than expected last month, fuelling expectations that the continuing consumer boom will lead the Bank of England to raise interest rates next month.

Retail sales grew much more strongly than expected last month, fuelling expectations that the continuing consumer boom will lead the Bank of England to raise interest rates next month.

The volume of sales on the high street rose 0.6 per cent in March to stand 6.4 per cent higher than a year ago compared with forecasts of an increase of about 0.2 per cent.

Meanwhile, figures from the Office for National Statistics showed that the economy overall grew less strongly in the first quarter of this year than the last quarter of 2003.

However, the Government cast doubt on the accuracy of the figures and the ONS itself issued a statement saying that they needed to be treated with "caution".

Richard Ratner, of Seymour Pierce, said the buoyant retail sales figures were likely to give the MPC the excuse it needed to raise rates in May, despite figures published earlier this week showing that inflation is running well below the Government's target at just 1.1 per cent.

Much to the surprise of some retailers themselves, one of strongest performing sectors last month was textiles, clothing and footwear, sales of which rose 8.1 per cent year-on-year. Household goods sales rose 9.1 per cent while sales of food were up 4 per cent.

On a quarterly basis, underlying sales in the three months to the end of March were 1.9 per cent up compared with the previous three months, and 6.6 per cent up on the same period a year earlier.

The GDP figures published by the ONS showed that the economy as a whole grew a provisional 0.6 per cent in the first quarter compared with expectations of a 0.7 per cent gain. In the last three months of 2003 output rose 0.9 per cent.

The slight dip in output in the last quarter was due to a fall in manufacturing activity. The service sector, by contrast, grew at a rate of 0.8 per cent with distribution, hotels and restaurants showing a 1.2 per cent gain, testifying to the two-speed nature of the economy.

Treasury officials in Washington, where Gordon Brown was preparing a speech to the International Monetary Fund's spring meetings extolling the UK's economic record, played down the significance of the GDP figures.

An official said that the slowdown was due to a 0.5 per cent slump in industrial output which was "out of kilter" with other evidence. "The ONS feels uncomfortable with the figures," he said. "The sense is that the ONS is paving the way so that people won't be surprised if they are revised later in the year."

The ONS said it had to use estimates for much of the service and constriction sectors and blamed the timing of Easter for a low level of response to some its surveys. "As more survey data become available they may lead to revisions to the overall estimate of GDP growth," it said.

The business lobby accepted that the strong retail sales figures pointed towards a rate rise next month but urged the Bank to proceed cautiously. David Kern, the economic adviser to the British Chambers of Commerce, said: "Manufacturing is still fragile and businesses face difficult pressures. The upturn must be nurtured to be sustained. While we appreciate that the MPC may have to tighten policy slightly in the near future, unduly large UK interest rises, at a time when the Fed still keeps rates at 1 per cent and the ECB considers a cut in rates, would put upward pressure on sterling and this could be damaging for UK investment in general and manufacturing in particular."

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