Sales recovery hits hopes of interest rate cut

An unexpected bounce in retail sales for September revealed in figures published today all but dashed expectations of an interest rate cut before the end of the year.

The Office for National Statistics said sales rose 0.7% last month, compared with analysts' forecasts for a 0.3% rise. It said the monthly rise was a result of food sales recovering, although mail-order sales had declined sharply.

In a reflection of market expectations that a rate cut next month had been virtually ruled out by the news, the pound jumped almost half a cent against the dollar.

"The release makes a November cut even more unlikely as the MPC [the Bank of England's monetary policy committee] waits to see whether September really does mark the start of a renewed retail recovery," John Butler, of HSBC, said. "We doubt it will, and continue to expect the next rate reduction to come in February."

Analysts had already started rowing back on their forecasts of a cut in November or December after Bank minutes yesterday showed that the MPC declined to even discuss a rate cut at its October meeting. The meeting saw borrowing costs held at 4.5% for the second month running.

In other figures that will strengthen the position of inflation hawks on the MPC, industry data showed mortgage lending enjoyed its strongest monthly rise in nine months in September. The British Bankers' Association said underlying mortgage lending rose by £5bn last month.

"This is a further sign that the housing market is outperforming the admittedly weak expectations for it," a statement from the Centre for Economics and Business Research said.

Although retail sales rose more than expected in September, the retail sector is not exactly booming.

In the third quarter as a whole, sales volumes rose just 0.4%, while year-on-year retail sales slowed to 0.7% - the lowest since January 1996. Sales values actually fell 0.1% from September last year in what was the weakest figure since records began after the second world war.

The volume of retail sales is the total takings adjusted for inflation, and the value of retail sales is the total actual takings.

"A combination of subdued underlying demand and rocketing retail space is clearly putting a lot of downward pressure on prices and profits in this sector at present," Mr Butler said.

"The worry must be that this will feed through into job losses, particularly when bearing in mind that a majority of the jobs created in the UK over recent years have been directly related to the consumer."