Bank 'certain' to raise interest rates

The Bank of England is "certain" to increase interest rates next month after official figures showed a surge in retail sales during June, City analysts said today.

The office for National Statistics (ONS) reported that football fans flocking to buy televisions and replica England shirts during Euro 2004 had contributed to a 1.1% jump in total sales volumes between May and June. The increase brought the year-on-year rate to 7.2%.

June's increase was the strongest in six months, and was almost three times the rate expected by economists.

Coming on the back of strong mortgage lending figures earlier this week, it sets the stage for another interest rate rise when the Bank of England's monetary policy committee (MPC) meets next month, analysts said.

"A 25 basis point interest rate hike in August is now a certainty," Howard Archer, an economist with Global Insight, said.

"Even allowing for the boost to retail sales from Euro 2004, it is clear that underlying consumer spending remained very strong in June, with the second successive 25 basis point interest rate hike at the beginning of the month having little dampening impact."

Retail sales have not shown a monthly decline for 13 months in a row - the longest period of expansion since comparable records began in 1986.

Sales in the three months to June were up 1.9%, suggesting that consumption will have driven overall economic growth higher. Figures out on Friday are expected to show GDP accelerating sharply in the second quarter.

"The strength of today's data shows that the UK consumers have been slow to respond to recent increases in the Band of England interest rate," Andrij Halushka, an economist with the Centre for Economics and Business Research, said.

Earlier this month, the MPC left rates unchanged following back-to-back rises. However, Bank minutes of the July 7-8 meeting indicated that further moves would be needed to prevent inflation from breaching the government's 2% limit.

The Bank has increased rates four time since November, amid growing concern about the boom in housing prices and strong consumer spending.

House prices had seemed to be coming off the boil in recent months, but this week's mortgage lending figures must have been an unpleasant surprise for Bank officials.

A surge in house purchases during June saw demand for home loans rising to a record ?6.5bn, according to the British Bankers Association.

"There had been further tentative signs of a slowdown in the housing market, although house prices were nevertheless above the level envisaged in the May inflation report projections," the Bank minutes noted yesterday.