Strong UK retail sales bolster case for rate rise

British retail sales enjoyed their strongest January for three years, with growth accelerating at the fastest pace since July, a survey showed yesterday, boosting expectations interest rates will rise again this year.

The pound rose against the dollar and euro and gains for retailers' shares helped boost the FTSE 100 index to six-year highs after the data, but analysts said it would be unwise to bet everything on a rate rise this month.

"We continue to believe that the Bank (of England) will hold rates this week at 5.25 per cent, although with the data having generally remained strong there are clear risks for another surprise move," said George Buckley, a Deutsche Bank economist.

The British Retail Consortium said the value of like-for-like sales grew an annual 3.1 per cent last month compared with a strong 2.5 per cent increase in December.

Total sales growth, which includes new floorspace, rose to 5.2 per cent from 4.4 per cent. The three-month annual rate for like-for-like sales picked up to 2.1 per cent from 1.9 per cent.

However, the BRC said the data cloaked an environment of heavy discounting in shops last month and were flattered by a modest January performance in 2006.

"The comparatives from last year are weak and the November and January interest rate increases have yet to make themselves felt," said Kevin Hawkins, the BRC's Director General. "No one should start clamouring for another rate rise on the basis of these figures."

The Bank of England raised borrowing costs to 5.25 per cent last month - the third hike in six months - and while markets expect another rise before the summer, few analysts expect rates to go up at this week's rate-setting meeting.

Nonetheless, consumer spending has held up despite higher borrowing costs and the BRC data chime with a report from the Confederation of British Industry last week which showed sales volumes soaring at their sharpest rate in more than two years. "The surveys suggest that we have avoided a repeat of last year when strong sales before Christmas were wiped out by a large fall in January," said Vicky Redwood, an economist at Capital Economics.

"So far, then, consumers appear to be taking higher interest rates in their stride - strengthening the case for a further rise in rates."

The BRC survey also boosted share prices in retailers such as Britain's largest supermarket chain Tesco and rival Sainsbury which was already trading at eight-year highs due to private equity bid speculation.

Britain's biggest retailer Tesco urged the BoE last month not to "over-apply the medicine" of interest rate increases following the surprise rise in January.

"The consumer had been cautious for the best part of a year, but has been prepared to spend up where they see value or where they want to treat themselves," Tesco Finance and Strategy Director Andrew Higginson said in an interview.

The strongest growth in food and drink sales since July's heatwave boosted last month's figures, the BRC said, as shoppers snapped up healthy options such as fresh fruit and vegetables.

Sales of women's clothes, furniture and carpets suffered their weakest month since last summer, however, with any gains largely dependent on discounting, the BRC said. The survey was conducted between December 31 and January 27.