Retail surge makes rate rise likely

Steady economic growth in the third quarter and a bounce in retail sales last month today reinforced expectations of a rise in interest rates next month.

For the three months to September, the gross domestic product grew 0.6% in preliminary figures from the Office for National Statistics. The figure was in line with expectations, while the retail sales surge of 0.6% last month was stronger than the forecast 0.4%.

Analysts said today's figures increased the likelihood that the Bank of England will raise the cost of borrowing when its monetary policy committee (MPC) meets next month.

"The [economic] profile now looks much stronger," Bank of America economist Lorenzo Codogno told Reuters. "GDP numbers seem consistent with the UK economy being close to potential growth. We are looking for a rate hike in November and these numbers seem to confirm this view."

Bank of England minutes released this week showed that four of the MPC's nine members voted earlier this month to raise rates from their 38-year low of 3.5% to 3.75%. The news came as a major surprise for City economists who did not expect the Bank to move until early next year.

According to the minutes, those pushing for a rate rise argued that inflation could be heading higher because of continued strength in consumer demand and house prices. Today's retail sales figures will reinforce the hand of the inflation hawks, especially as August and July's figures were revised up sharply.

With today's GDP numbers, economic growth is set to meet Gordon Brown's projections for the year. In his April budget, the chancellor forecast growth of 2-2.5%, widely derided at the time as overoptimistic. Now, it looks like Mr Brown will have the last laugh.

The government seized on the numbers as evidence that Britain was now poised for sustained recovery.

"The evidence from the second and third quarters now demonstrates that economic growth has strengthened and is becoming more balanced," Ed Balls, told Reuters at an economic meeting in Mexico. "Household consumption spending has continued to grow strongly, the labour market has remained resilient, and business confidence is rising."

Although the consensus is that rates will go up next month, some analysts argued that it was not a done deal.

"Today's economic news does not support a picture of a buoyant economy in need of an interest rate rise. We may expect strengthening of the doves' position in the MPC by the time of their next meeting on 5 November," said Andrij Halushka, economist with the Centre for Economics and Business Research.