Retail sales promise pre-election boom

Retail sales volumes grew at their fastest rate for eight years during the summer, confirming the Government would get the pre-election boom in the economy it had been hoping for.

But the latest evidence of surging consumer spending is likely to bring the Chancellor of the Exchequer into conflict with the Bank of England over interest rates. Minutes of the meeting between Kenneth Clarke and Eddie George, Governor of the Bank of England, at the end of July published yesterday revealed that the Bank wanted higher interest rates because of the pick-up in demand.

The Governor's opinion will have been reinforced by the economic news during the past month. Although analysts think Mr Clarke will resist raising the cost of borrowing ahead of the general election, yesterday's figures made it likely that the next move would have to be an increase. The prospect of clashes between the Governor and the Chancellor, next due to meet on Monday, unsettled the markets. The FT-SE 100 index of leading shares ended nearly 17 points lower at 3,955.6.

"An interest rate rise is obviously closer. But the Chancellor will not want it before the election," said Marian Bell, chief economist at the Royal Bank of Scotland.

Robert Barrie at BZW agreed about the political timing. "It is whoever wins the election who will have to sort out the public finances and put interest rates up," he said.

The volume of retail sales jumped 1 per cent in August, and 1.6 per cent in the latest three months. This was the strongest advance since August 1988.

Kevin Gardiner, UK economist at investment bank Morgan Stanley, said: "Consumers have plenty of money to spend and they are out there spending it." Lower mortgage rates, income tax cuts and consumer "windfalls" such as this year's electricity rebates have boosted spending power.

Sales of clothing and footwear and of household goods explained much of the summer's increase in high-street spending. The clothing, footwear and textiles category was up 5.6 per cent in the latest three months, its fastest growth for at least 10 years. Household goods sales expanded by only 0.6 per cent in the three months to August but their year-on-year growth was among the strongest at 6.8 per cent.

The weakest area was food sales. The volume of sales in food stores rose by only 0.3 per cent in the latest three months and by 0.6 per cent compared with a year earlier.

The cash value of sales on the high street increased by 6.4 per cent in the three months to August compared with a year earlier.

Yesterday's surprisingly buoyant figures supported the case made by Mr George at the 30 July monetary meeting.

The Governor argued then that the expected pick-up in demand had started. According to the minutes: "On that basis the Bank saw no justification for further policy stimulus. In fact, as the Chancellor knew, the Bank would prefer short-term rates at 6 per cent."