Interest rate rise back on the agenda as retail sales surge

Shoppers flocked back to the high street in droves last month, with retailers enjoying the biggest leap in sales for two years.

After tumbling by 1.5 per cent in January despite deep discounting in the new year sales, retail sales volumes jumped by 1.4 per cent in February - the largest monthly increase since January 2005 and double the City's forecast, official figures showed yesterday.

The year-on-year rate of increase rose from 3.5 to 4.9 per cent. Analysts said the news that consumers were splashing out again put the prospect of an April rise in interest rates back on the table, propelling sterling to a six-week peak of $1.9726.

Clothes shops and shoe shops were the biggest winners, with sales rocketing by 4.7 per cent during the month - the biggest jump for more than four years. The only sector not to cash in was department stores, where sales slipped by 0.2 per cent.

Philip Shaw, chief economist at Investec, said: "The retail sales figures have been exceptionally volatile in recent months - four out of the last five months have recorded moves in excess of 1 per cent in either direction - making it much more difficult to assess underlying trends.

"However, the picture that is emerging appears to be that higher interest rates are only having a limited effect on consumer activity, at least so far." Rates have been lifted three times since last August.

February's spending rebound came despite more evidence that high street deflation is fading. Shop prices were 0.3 per cent lower than a year earlier, less than half the average rate over the medium term.

Ross Walker, UK economist at Royal Bank of Scotland, said: "This will keep the Bank of England's Monetary Policy Committee focused on the upside inflation risks over the medium term."

Meanwhile, the latest snapshot of the manufacturing sector from the CBI showed factory order books at their fattest for nearly 12 years and firms increasingly confident they can make price rises stick.

The CBI said a net 8 per cent of manufacturers reported order books "above normal", double last month's balance and the strongest since May 1995. In another sign that inflationary pressures are building, a growing number of firms expect to push up their prices. For the consumer goods sector, a net 38 per cent of firms are planning to do so - the strongest balance for 17 years.

Ian McCafferty, the CBI's chief economic adviser, said: "The revival in the fortunes of UK manufacturing shows no signs of abating yet, with domestic demand driving growth. Better trading conditions mean more firms feel they can pass on price rises. With many - particularly smaller to medium manufacturers - still locked into last year's high-cost energy contracts, the pressure to repair profit margins remains strong."

James Knightley, an economist at ING, said: "With inflation edging back up, money supply growth in double digits, house price growth continuing to rise and consumption staying firm, we believe that the Bank of England will raise rates to 5.5 per cent by May."