Retail sales grow at fastest rate for five years

Spending in Britain's high streets rose at its sharpest rate for five years last month as a combination of warmer weather and rising incomes boosted demand, retailers said last night.

Despite the impact of the foot and mouth epidemic on overseas tourism in London, sales in May were almost 10% higher than a year earlier, according to the monthly snapshot of activity in shops and stores from the British Retail Consortium and business services firm KPMG.

The figures underlined the two-speed nature of the economy, following evidence of a further weakening of the manufacturing sector last week. City analysts believe the buoyancy of consumer spending is likely to deter the Bank of England from cutting interest rates when its nine-strong monetary policy committee starts a two-day meeting to decide interest rates today.

Sir Eddie George, the bank's governor, said in Singapore yesterday that it had been necessary to cut interest rates to offset the impact of external factors and to encourage further growth.

"With inflation running below target [and] expected to run below target for some time, we had in effect to seek to offset these dampening external influences by encouraging sustained growth of the domestic environment through reduction in interest rates," Mr George told the International Monetary Conference.

The BRC data showed that sales in May were 9.3% higher than in the same month a year earlier. After taking account of increase in floor space, the BRC said like-for-like sales were 7.1% up. The timing of May's bank holidays, and higher sales of clothing and gardening goods were factors in pushing up sales.

Bill Moyes, director general of the BRC, said: "This is another set of very healthy figures. If this continues, we should see retail employment starting to grow after the year-on-year contraction in March.

"However, there is concern for stores in London; the government must take action to rescue the tourist trade."