Upbeat economic data may not stave off rise in interest rates

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A last-minute flurry of upbeat economic data yesterday did nothing to calm nerves before the Bank of England's decision on interest rates at noon today.

Shop prices rose as shoppers flocked back to the high street, construction activity accelerated and rural house prices posted solid growth.

Although a majority of City economists expects rates to stay on hold at 4.5 per cent, a growing number has switched to forecasting an increase while others are getting increasingly nervous.

"This week's data have made us even more twitchy about our call for unchanged interest rates," said Howard Archer, the chief UK economist for the consultancy Global Insight. "It is now looking a very tight call."

Inflation on the high street hit a two-year high last month as prices rose 0.7 per cent from July 2005, the British Retail Consortium said. It was the first rise since September last year and the highest since July 2004.

The increase was driven by food prices, which are being pushed up by shortages related to the hot weather. This offset a fall in general goods prices.

"This will be of concern to the Bank and could well give the Monetary Policy Committee a significant late nudge," one trader said. It followed figures on Tuesday showing manufacturers were able to impose their largest price rise for two years.

The final week of July saw a sharp rise in the number of shoppers at the UK's main retail centres, two surveys showed.

FootFall said visitor numbers rose 6.4 per cent on the week, with the department stores the big winners with an 11.1 per cent gain. "As school holidays get under way, retailers should hope to see an upturn in the coming weeks," Natasha Burton, a FootFall spokeswoman, said.

SPSL said shopper numbers were up 11.5 per cent on the week although down almost 3 per cent year-on-year. But Tim Denison, the director of knowledge management, warned: "With economic growth above trend, a tightening of credit terms and still rising energy bills, the possibility of another tipping point is never too far away."

There was fresh evidence of strength in the housing market. Housebuilding activity grew again after June recorded the steepest decline in the survey's nine-year history, the Chartered Institute of Purchasing and Supply said.

Estate agents Knight Frank said "prime" country homes prices rose an average of 3.9 per cent in the three months to June, the fastest growth rate since March 2004.

The National Association of Estate Agents said rises in prices this year were often inflated by falls last year, meaning that values were simply clawing back lost ground.

Peter Bolton King, its chief executive, said: "Expenses such as council taxes and gas and electricity prices are putting an extra strain on consumers' pockets."