Interest rise looms in retail sales rush

Britain's homeowners were last night bracing themselves for higher mortgage payments after upbeat news on retail sales and economic growth made a rise in interest rates almost inevitable early next month.

Consumers returned to the shops in September after the summer heatwave, helping retail sales to rise at an annual rate of 3.9%, while the economy notched up a healthy 0.6% rate of growth in the third quarter of the year, according to the Office for National Statistics.

Analysts said confirmation that the consumer-led services side of the economy is expanding strongly was likely to swing opinion on the Bank of England's nine-member monetary policy committee behind raising interest rates at its next meeting on November 5 and 6.

Minutes published this week showed that the committee rejected a rate increase by five votes to four at its October meeting after the resilience of the household sector, propped up by booming property prices and mounting debt levels, took the Bank by surprise over the summer.

After yesterday's news, Gordon Brown seemed likely to hit the bottom end of his 2-2.5% forecast range for economic growth this year, which was dismissed as overoptimistic by many analysts when he made it in April's budget.

But the data reinforced concerns about the unbalanced state of Britain's economy, with all of the 0.6% GDP growth in the third quarter of the year coming from services, which expanded by 0.7%, while industrial output was flat.

Within the services sector, statisticians said business services and finance firms saw the strongest growth in activity, while hotels and restaurants were hit by a slowdown.

Business groups cautioned that the uneven nature of economic growth revealed in the figures meant manufacturers would suffer if rates went up in November.

"The business sector still faces serious risks, and any consideration of higher interest rates should be delayed until the situation is clearer," said David Kern, an economic adviser to the British Chambers of Commerce.

September's surge in retail sales, after a slow month in August, was boosted by a rush to stock up on autumn clothes. The ONS said sales of clothing and footwear were up almost 9% on the same month a year ago, helping quarterly growth in retail sales to hit a much stronger than expected 1.2%.

Food stores saw their sales decline by 0.2% in September, after putting in an exceptionally strong performance in August.

City investors now expect a spate of interest rate rises to take borrowing costs up by as much as 1.5% to 5% by the end of next year. But economists were already speculating yesterday that higher rates could put the brakes on economic recovery more quickly than the Bank intends.

"The danger is that rate rises would not solve the problems facing the UK but instead could derail any recovery before it gathers momentum. Aggressive rate rises could trigger a sharp consumer downturn while driving up sterling and blunting any recovery in the traded sectors," warned John Butler, the chief UK economist at HSBC.

Ross Walker, of Royal Bank of Scotland, said that because the strong retail sales performance is supported by borrowing, a small rise in rates could have a significant effect. "In itself, a quarter-point rise in rates won't do much to dent disposable incomes. The concern is the psychological effects of a rate rise on consumer confidence," he said.