Upturn fuels rate rise fears

Evidence of a sharp pick-up in economic growth, fuelled by more robust consumer spending, added to fears yesterday that interest rates might be increased to keep the lid on inflation.

As the Bank of England's monetary policy committee began its two-day monthly meeting, the Confederation of British Industry said that retail spending had increased last month at its fastest rate for nearly 18 months.

Meanwhile, the Chartered Institute of Purchasing and Supply's monthly snapshot of the services sector showed the strongest rise in new business for two years.

In the wake of data earlier in the week showing manufacturing pulling out of recession, economists said there was now little doubt that the rebound in economic growth witnessed in the second quarter would be sustained.

But, with inflation firmly under control in the short term and growth still below the economy's long-term average, there was no need to tighten monetary policy immediately to safeguard the government's 2.5% target.

The City believes that, while the Bank's repo rate, currently 5%, will fall no further, it is unlikely to begin rising for several months. Sterling futures contracts are anticipating an increase of at least 0.75 percentage points by March next year.

The Cips survey showed that most of the service-sector industries enjoyed a pick-up in activity last month, with particularly strong gains among finance firms, which benefited from the strength of the housing market. "Only the computing and IT sectors failed to benefit from improving business conditions," the institute said.

Despite the buoyancy of demand, tough competition meant that service-sector firms were unable to raise their prices.

Average prices actually fell for the first time in five months.

The CBI endorsed the view that the inflation outlook was benign. "Today's survey provides more good news for the economy and confirms that the recent series of interest rate cuts acted as a spur to encourage consumers to spend," said Alastair Eperon, chairman of the CBI's distributive trades survey panel.

"However, the increase in sales volumes has not been achieved without pain. Retailers in most sectors are still having to compete aggressively. So this survey is not a green light for the MPC to increase interest rates. Indeed, while the CBI believes that rates should remain on hold this month, there could be scope for a further cut before the end of the year."

The CBI survey found that 50% of retailers enjoyed an increase in sales volumes last month compared to July last year, while 22% said business fell, leaving a positive balance of 28%. This compares with 22% in June and 11% in May.

Grocers, confectioners, off-licences, chemists and durable household goods specialists reported the largest increases in sales.

Clothes, furniture and shoe retailers also had a reasonable month but booksellers, stationers, hardware, china and DIY stores all reported weaker sales than last year.