Rate rise looms as sales soar

SOARING HIGH STREET sales in May made a further interest-rate rise look more likely yesterday. Retail sales volumes leapt 1.7 per cent last month, confounding expectations that demand would continue its downward trend.

Hints from Eddie George, Governor of the Bank of England, that he was among the majority of the Monetary Policy Committee voting for a rate rise earlier this month added to the interest-rate gloom.

Mr George told MPs on the Treasury Committee that inflation had been "pretty stubborn" and added that if last week's change of tack on public spending resulted in looser fiscal policy, the MPC would have to take a tougher stance on interest rates.

Differences in opinion between the members of the Bank of England's Monetary Policy Committee (MPC) were evident, however. DeAnne Julius, a fellow member, said rates were too high and warned of the risk of recession.

Yet the City concluded that the MPC would tilt in favour of an increase in borrowing costs at one of its forthcoming meetings. These fears took the pound up three pfennigs, back to its highest level since 1 May and approaching DM3.

In written evidence to MPs, the Governor said the growth rate of domestic demand was "well above" the rate "which could be sustained without giving rise to inflationary pressures". He saw "very little likelihood" of deflation.

Mr George fanned speculation about his voting behaviour at this month's meeting. He said it would not be embarrassing if the Governor were to vote with the minority of MPC members, but added: "If there were a majority of people who were clearly taking one view, then that would weigh very substantially."

City economists have speculated that Mr George switched from the doves to the hawks to vote for this month's rate rise.

Dr Julius told MPs she was not persuaded that the economy had exceeded its capacity constraints. The only MPC member who voted for a rate cut in May, she added that monetary policy was too tight. "There is certainly a risk of recession," she said.

Most economists predict an uncomfortable period of slower growth and greater inflationary pressure ahead. "The trend on the high street is slowing, although not dramatically. But the higher earnings growth means it would now be odd if the Bank did not raise rates," said Simon Briscoe at Nikko Europe.

Official statistics earlier this week showed a jump in pay growth past the 5 per cent barrier, and the first rise for two years in people claiming unemployment benefit.

Retail sales volumes jumped 1.7 per cent in May, mostly because of a whopping 8.7 per cent gain in sales of clothing and footwear. Year-on- year growth jumped to 4.6 per cent from 4 per cent in April. The volume of sales in the latest three months was 4.3 per cent higher than a year earlier.

Separately, lending figures from the high street banks and building societies suggested that activity in the housing market dipped last month. Their combined lending amounted to pounds 1.4bn, down from pounds 1.6bn the previous month.

Barclays yesterday joined the ranks of banks announcing higher mortgage rates, up from 8.7 per cent to 8.95 per cent.