Consumer spending boom triggers interest rate alert

Britain's shops returned to the boom conditions of the late 80s last month as low interest rates, warm weather and the feelgood factor generated by soaring property prices prompted a spending spree, the government said yesterday.

Clothing and footwear sales grew at their fastest rates since records began in 1986, as part of a surge in consumer activity that pushed retail sales growth to an annual rate of 6.9%.

City analysts said that the failure of consumers to heed Bank of England warnings about the need to rein in their spending increased the risk of an early increase in interest rates - perhaps as soon as next month.

"It is now just a case of whether we see tightening in July or possibly in June," said Jeremy Hawkins, an economist at Bank of America. "It just comes down to how pre-emptive the Bank wants to be."

Amid fears that rapidly rising property prices are fuelling a borrowing binge, officials said retail spending rose by 1.7% in April, three times as fast as the City had expected.

The sunniest April for more than a decade encouraged consumers to stock up on their summer wardrobes. Clothing and footwear sales were 17.1% up on the same month last year.

The office for national statistics said, however, that the strength of demand was spread across the whole retail sector. Non-food stores enjoyed annual growth of 9.5%, the highest since May 1988, when interest rates reached 7.5%, their lowest point during the Lawson boom.

Price-cutting among retailers helped to lure consumers into the shops. The strong pound, which is depressing the cost of imports, and ferocious competition, meant prices were 0.3% lower last month than in April 2001, according to the ONS.

The weakness of inflationary pressure, coupled with renewed signs of the fragility of manufacturing yesterday, led some analysts to question how soon the Bank of England would be forced to put up interest rates.

Government figures showed that Britain's cash-strapped businesses slashed investment for the fifth successive quarter in the first three months of 2002 as the squeeze on profits took its toll.

Meanwhile, the Confederation of British Industry, Britain's leading employers' association, warned that Britain's manufacturing sector was recovering more slowly than hoped, and was still far too weak to withstand higher interest rates.

Ian McCafferty, the CBI's chief economic adviser, said: "Manufacturers' hopes were bolstered at the start of the year, with the pace of world growth looking strong. But mixed results from the US and Europe in the early part of the second quarter indicated a stutter in recovery, and manufacturers have scaled back expectations."

The Bank has so far resisted the temptation to raise rates from their 38-year low of 4%, agreeing unanimously earlier this month that it was too soon to take recovery for granted. Daniel Kaye of Capital Economics said the Bank was right to hold its fire.

"The sluggishness of the industrial recovery and uncertainties about the global economic recovery mean the MPC still does not want to take chances with economic growth - and still favours strong consumer spending to none at all," he said.

The Bank cut interest rates seven times during the course of 2001, first in response to the rapid slowdown in the US, and then to bolster consumer confidence in the aftermath of the September 11 terrorist attacks on New York and Washington, when it was feared that the global economy could slip into a full-blown recession.

Retail sales growth slipped back at the turn of the year, but as the full impact of cheaper borrowing has fed through, consumer spending patterns have recovered.

With house prices rising at more than 15% a year - six times the rate of inflation - and unemployment below one million, consumers have felt confident enough to stack up extra debt.

Earnings are rising only modestly, but credit growth is running at record levels, and homeowners are boosting their spending by borrowing against the rising value of their properties.