Shopping boom reduces likelihood of rate cut

Consumers shrugged off warnings about an economic downturn and flocked to the high streets last month, attracted by bargain prices in the summer sales.

Retail sales jumped by 0.6% in July, led by clothing and footwear sales which rose by 1.3%, according to the office for national statistics.

City analysts had pencilled in a rebound of 0.4% after flat sales in June, and the stronger than expected rise added to the growing belief that there may not be another interest rate cut soon from the Bank of England.

"Retail sales remain robust and significantly reduce the chances of a further cut in interest rates later this year," said Ross Walker, UK economist at the Royal Bank of Scotland.

Yesterday's figures followed better than expected jobs data on Wednesday, which showed the number of people claiming unemployment benefit falling to a new 26-year low. Lower unemployment, strong wage growth and rising house prices are all adding fuel to the shopping boom.

"The persistent strength of consumer demand, especially after yesterday's labour market data, further reduces the scope for more interest rate cuts," said Jeremy Hawkins at Bank of America.

Worries about the growing imbalance between the strength of the consumer sector and the recession in manufacturing led some members of the Bank's nine-strong monetary policy committee to argue against this month's surprise rate cut.

But the ONS data showed that it took heavy discounting by retailers to attract shoppers back on to the high streets. Prices fell by 0.3% over the month.

"Consumers have lost none of their price sensitivity," said Daniel Kaye, UK economist at Capital Economics.

The strongest growth was in sectors where prices are falling fastest. Clothing and footwear sales are rising at nearly 12% a year, the fastest rate of growth since records began. However, prices are 3% lower than this time last year.

"This suggests that strong sales growth is being encouraged by continuing price competition on the high street," said Simon Rubinsohn, chief economist at Gerrard Limited. "While the discounting may not be as intense as during 2000, it is clearly still visible."

Some analysts pointed to anomalies in last month's figures which could be an indication that sales growth may slow.

Half the increase in July sales was in the non-store retailing category, a catch-all group which includes mail order and internet sales. The ONS said some of the 6.1% increase over the month could be accounted for by mail order companies sending out their autumn catalogues earlier than usual.

George Buckley at Deutsche Bank in London thought it was highly unlikely that this level of growth would continue into August.

"That looks unsustainable and I would be surprised if that does not unwind next month and take the froth off these punchy numbers," he said.

Good weather on the final weekend of the period also helped get shoppers out. Fashion retailer Monsoon recently reported that like-for-like sales had jumped 7% in the eight weeks to July 21, helped by fine weather.