Retail sales rise makes rate cut unlikely

The prospects of a fall in interest rates took a further knock today as retail sales rose at a more rapid clip than expected in March.

The Office for National Statistics (ONS) said sales rose by 0.7% last month against City expectations of a 0.3% increase. But the sales rise in February was revised downwards to 0.3% from the original figure of 0.5%.

March's sales data will buttress those Bank of England decision makers who have argued against lower borrowing costs, partly on the grounds that consumer spending will hold up.

Although today's figures should further undermine the prospects for lower interest rates any time soon, some analysts expressed scepticism about the strength of consumer spending in the months ahead.

Despite the better than expected figure in March, retail sales in the first quarter shrank by 0.7%, in sharp contrast to the 1.6% expansion recorded in the last three months of 2005.

"The bottom line is that retail sales have slowed since the impressive Christmas period, irrespective of the rise in house prices and housing activity," said John Butler of HSBC. "Moreover, the value of retail sales is just 0.1% higher than a year ago, showing that the volume growth that is being achieved is being achieved through heavy discounts."

Other analysts pointed out that sales in March were boosted by a particularly sharp rise in the volatile non-store (mail order and internet) sector, which could easily be reversed next month.

In other data, the ONS reported that Britain's public sector net borrowing in the fiscal year just ended came in slightly above Gordon Brown's budget forecast. The ONS said public sector net borrowing (PSNB) for 2005/06 was £37.8bn compared with a forecast for £37.1bn made by the chancellor during his budget last month. For March, PSNB was £6.9bn, compared with forecasts for £7bn.

Although March's data means Mr Brown has largely met his budget projections, analysts believe he will struggle with his public finance targets for this year and next.

"This is likely to necessitate significant corrective action in the longer term, be it through an ever tighter rein on public spending growth than is already indicated further out, or through tax increases," said Howard Archer of Global Insight.