High street surge points to interest rate rise

Spending on Britain's high streets surged over the summer while the overall economy continued to recover, paving the way for a rise in interest rates next month, experts said yesterday.

Spending on Britain's high streets surged over the summer while the overall economy continued to recover, paving the way for a rise in interest rates next month, experts said yesterday.

Retail sales rose sharply last month as shoppers flocked to take advantage of falling clothes prices, official figures showed. Meanwhile the economy grew 0.6 per cent in the three months to September. While this was in line with forecasts, retail sales growth was stronger than predicted, boosting speculation of an imminent rate rise. "Consumer spending is booming again," said Adam Cole, a senior economist at Credit Agricole. "A rate hike [next month] now looks unavoidable."

The pound briefly broke through the $1.70 mark against the dollar, a fresh five-year high. Sterling has risen almost 6 per cent in the past three months. The figures are also good news for Gordon Brown as another quarter of economic growth would put him on track to hit his forecast of annual GDP growth of between 2 and 2.5 per cent. Ed Balls, his chief economic adviser, said Britain was "well-placed to benefit from the global economic upturn", adding:"Household consumption spending has continued to grow strongly, the labour market has remained resilient, and business confidence is rising."

Mr Balls went on to praise the Bank of England for its"forward-looking activism" - a stock Treasury phrase but one that will seen as a sign it is braced for a pre-Christmas rate rise. He told Reuters: "This has helped sustain growth through the global downturn, and it is that continued forward-looking approach, at every stage of the economic cycle, that will lock in stability and maintain the conditions for sustainable growth."

The ONS said sales volumes rose 0.6 per cent in September. New revisions showed they grew 0.5 per cent in August - almost three times the first estimate. A slump in sales in July was revised away. This added up to quarterly growth of 1.2 per cent, which contributed to a marked acceleration in growth in the services sector in the third quarter.

The sector, which makes up two-thirds of the economy, grew 0.7 per cent compared with 0.2 per cent in the previous quarter. This offset minimal growth on the production side of the economy to deliver growth of 0.6 per cent, the same as the previous quarter. The Treasury said a similar rise in GDP in the final three months of the year would probably be enough to meet the Chancellor's target.

There was close to unanimity in the City that November would herald the first rate rise since February 2000, but there was less certainty about the path for monetary policy thereafter. Philip Shaw, chief UK economist at Investec Bank, said rates would rise from 3.5 to 5.5 per cent by 2005. "The experience of the last 10 years suggests that if the interest rate cycle turns soon, it will be the first of a series of hikes that is continued early next year."

But Ciaran Barr, chief UK economist at Deutsche Bank, said rates would peak at 4.25 per cent. "While we look for a tightening of policy beginning in November, we expect the Bank to tread very cautiously.

Meanwhile the OECD, the rich nations' think tank, warned that global financial markets faced numerous risks - including rising interest rates - which could dent investors' optimism.