Unseasonable spending may forecast interest rate rise

An unexpected bounce in retail sales in August today fuelled expectations of another rise in interest rates before the end of the year.

The Office for National Statistics (ONS) said retail sales rose 0.6% last month versus expectations of a 0.3% fall, bringing the year-on-year rate up to 6.5%.

Today's figures came as a surprise to the City following recent indications of a slowing down of the economy, particularly in house prices. The apparent cooling off of the property market and in consumer spending had led analysts to pare back their interest rate forecasts. Most analysts think that interest rates, currently at 4.75%, are close to their peak. But the latest retail sales figures may lead to some reassessment.

"The fundamentals remain the key and on that basis conditions for the consumer remain positive. Employment is at a record high, real earnings growth is stronger than last year and interest rates are just 4.75%.

"A material consumer slowdown will require higher interest rates. We still expect a November rate move, with more to come thereafter," said John Butler of HSBC, a longtime sceptic of the notion that the consumer is losing wind.

The rebound in August sales was led by sharp rises for clothing and footwear and department stores. Textile, clothing and footwear sales jumped 3.7 % on the month, their biggest increase in more in than a year.

The ONS data contrasted sharply with survey evidence suggesting that exceptionally wet weather in August had kept consumers away from shops, particularly clothing stores.

B&Q, the DIY chain owned by Kingfisher, said earlier that high growth in kitchens, bathrooms and electricals offset weakness in more seasonal ranges such as garden furniture and exterior decoration.

"The relatively strong rebound in retail sales volumes in August, after July's drop, indicates that recent reports of the death of the consumer may be premature and reinforces our belief that the Bank of England will still raise interest rates by 25 basis points in November," said Howard Archer, an economist with the consultancy Global Insight.

"Nevertheless, August's rebound was probably influenced by significant discounting, highlighting the fact that shoppers are very price-conscious.

Taken over a three-month basis, however, retail sales in the three months to August grew at its slowest pace since the three months to September last year. For the three months to August, sales were 1.4% higher than in the previous quarter. That followed growth of 1.8% in the three months to July and 1.9% in the three months to June.