Retail relief as festive spending surges

Mortgage lending at record levels * Sterling tests highs * CBI survey points to new year rate rise

A rebound in consumer spending and a record surge in borrowing in the run-up to Christmas put the markets on red alert for a new year rise in interest rates yesterday.

Festive spending has begun in earnest, while house buyers took on record levels of mortgage debt last month, according to two surveys that showed the consumer economy was in rude health.

The pound was close to its highest in six weeks against the euro and rose above $1.97 against the dollar as traders bet on a February rate rise. Retail sales soared over the past four weeks to their highest level for two years, according to a snapshot survey by the CBI of 86 retailers. It showed that 47 per cent said sales were higher than a year ago, while 22 per cent reported a drop.

The balance of plus 25 per cent in December, compared with minus 9 per cent in November, was the highest level since Christmas 2004. Last month, retailers forecasted another drop.

The survey covered the four weeks to 13 December, but the CBI said there was anecdotal evidence in the last 10 days.John Longworth, the chairman of the survey panel, and a director at Asda, said: "After a slow start in the run-up to Christmas, sales are really beginning to build. It's going very fast."

However, the CBI said it had been a "disappointing" run-in to Christmas compared with previous years, and said retailers were predicting lacklustre sales in January. Ian McCafferty, its chief economic adviser, said: "The underlying conditions for consumer spending are reasonable, but not great. Real income growth is barely positive and consumer confidence surveys are not indicative of a market where people are feeling buoyant."

However there was little sign that the two rate hikes since August had deterred Britons from taking on even more debt. The British Bankers' Association said mortgage lending posted its strongest monthly increase on record in November, rising by £6.5bn, while the Council of Mortgage Lenders, who also reported a record increase in total gross lending of £33.1bn, said it expected lending to outstrip its own forecasts for the next two years. CML director general Michael Coogan said: "The housing market is undoubtedly in robust shape as we move towards the New Year. Mortgage lending looks set to remain seasonally strong over the winter months, reflecting a continuing high level of transactions and house price growth. As for 2007 as a whole, we expect to see gross lending of around £360bn - another record-breaking year."

The minutes of this month's meeting of the Bank of England's monetary policy committee said some members were worried about rising house prices.

"There has been some news on the housing market where prices had clearly risen faster than expected and, for some members, this was an upside risk to the near-term outlook for consumption," it said.

The MPC voted nine-nil to keep the base unchanged at 5 per cent as expected, but left the door open if the recent jump in inflation fed through to a large rise in New Year pay deals. "Some members thought that there seemed to be a little more underlying inflationary pressure than expected," it said.

City analysts said the bank would wait for evidence of New Year spending and pay deals, as the CBI survey was not seen as a reliable guide. "The door is still open to a move up in rates in February," said Allan Monks, from JP Morgan. "But there was plenty in the minutes that gave vindication to our view that rates are on hold at 5 per cent."