Surge in retail sales puts rate hopes on hold

Hopes of a cut in UK interest rates early in the new year were dashed yesterday by reports showing a surprise surge in high street spending and an unexpected revival of fortunes for the manufacturing sector.

Hopes of a cut in UK interest rates early in the new year were dashed yesterday by reports showing a surprise surge in high street spending and an unexpected revival of fortunes for the manufacturing sector.

Consumers ignored rail chaos and bad weather to flock to the shops last month, boosting total retail sales by 0.7 per cent over October's figure. This left annual growth at 4.7 per cent, its highest in seven months.

Economists, who had forecast a rise of 0.2 per cent month-on-month and annual growth of 3.9 per cent, said this showed consumer spending was not slowing fast enough to allow rates to be cut. Nick Stamenkovic, a senior strategist at Nomura International, said: "The domestic side of the economy seems to be holding up quite well and there's no urgent need for an early cut."

The pound jumped to a two-month high of $1.4655, while short sterling - a barometer of future rate moves - eased as the market scaled back expectations of looser monetary policy.

Despite the surge in sales, National Statistics, the government office that produced the data, said the figures suggested that the underlying rate of growth in retail sales was much the same as in October, when there was zero growth.

Growth was strong across the board, with robust growth in sectors such as household goods and clothing that are barometers of consumer confidence. NS said the data did not indicate any impact from the bad weather, but that the period of deflation in the non-food sector was ending.

The deflator - an indication of price changes on the high street - rose slightly to minus 0.3 per cent in November from a revised minus 0.4 per cent in October, although prices are still falling. This follows the inflation figures for November, which showed average price rises for goods at their highest for eight months.

The view that the economy was not slowing as fast as expected was supported by the monthly survey of manufacturers by the CBI. This found businesses' output at its highest since March, with order books their best for almost three years.

The survey of almost 1,000 firms showed that export order books were at their strongest since July 1997, despite sterling averaging DM3.30 against the old German currency - way above the level the CBI thinks firms can cope with.

Sudhir Junankar, a senior CBI economist, said: "The less downbeat mood is perhaps a little surprising. The results of next month's, more comprehensive quarterly survey will need to be closely watched to see whether or not the upturn in manufacturing output is set to become firmly established."