Relief as Bank of England holds off interest rate rise

News yesterday of a general recovery on the high street coincided with the Bank of England's decision not to raise interest rates. The Bank's announcement sent the pound lower and brought relief all round - for the time being. Diane Coyle, Economics Editor, reports.

Retail spending in December was higher than many had feared, according to the Confederation of British Industry. Its latest survey reported a recovery in the growth of sales volumes, both before and after Christmas, following a slowdown in November.

Alastair Eperon, chairman of the survey panel for the CBI, said: "We will be monitoring January's figures closely to see whether the slight upward momentum in consumers' spending is sustainable."

The employers' organisation also welcomed the Bank of England's decision to leave interest rates unchanged at 7.25 per cent. Kate Barker, chief economist, said: "Further interest rate rises risk having too great an impact when the economy is already expected to be sluggish."

The pound shed more than three pfennigs yesterday, falling to just over DM2.93. The benchmark long gilt yield dropped to a record low below 6 per cent. Both moves were driven by hopes that the Bank's decision could mark an end to the series of rises in the cost of borrowing, as well as by the US financial markets.

The US Treasury bond market got a boost from figures showing a small fall in prices charged at the factory gate in November. Producer prices declined by 0.2 per cent to a level 0.6 lower than a year earlier, mainly due to lower car and truck prices.

But City analysts remained divided about whether a sixth increase in UK interest rates since May 1 is either necessary or likely, especially after yesterday's survey and another earlier in the week showing the service industries still very buoyant. Some think that the economy is not slowing fast enough to keep the Bank's Monetary Policy Committee happy.

"This is just a stay of execution," said Leo Doyle of Dresdner Kleinwort Benson, predicting a rate rise next month.

However, Michael Saunders at Salomon Brothers said: "The export sector has already weakened, and consumer spending will follow." He disagreed with the majority view that rates would climb another quarter point in February.

The CBI survey showed that the balance of retailers reporting higher rather than lower sales climbed to 35 per cent in December, up from a weak 23 per cent in November. The respondents expected a further gain in January, although their expectations have often been disappointed in recent months.

Food, confectionery, clothing, DIY stores and booksellers all enjoyed a strong December. All except shoe shops did better than they had in November. Motor traders also reported a big jump in sales in December, defying their earlier fears of a downturn.

Official figures for December sales on the high street will be published later this month. Meanwhile, the Office for National Statistics issued figures yesterday painting the most comprehensive portrait of sales in the distributive and service industries during the third quarter of 1997. These showed car sales in the UK reaching a record pounds 22.5bn. The total soared 20 per cent compared to the second quarter and was 10 per cent higher than a year earlier.