DATAWATCH Strong UK retail sales data reignites talk of April rate hike

DATAWATCH Strong UK retail sales data reignites talk of April rate hike

	Published : Thu, 22 Mar 2007 12:12 By : Agencies Print this Story

LONDON (AFX) - A rebound in UK retail sales has reignited talk that the Bank of England will raise its key repo rate a quarter point to 5.50 pct in April.

Markets had scaled back rate hike expectations yesterday when the minutes of the Bank of England's last rate setting deliberations came in a lot more dovish than predicted.

Today, however, brought a change. The Office for National Statistics revealed that retail sales rose by 1.4 pct in February from January. The rise was the biggest since Jan 2005 and was far more than the 0.8 pct increase predicted by analysts.

'We were surprised by how much weight the Monetary Policy Committee appeared to put on the January figures in the March minutes and today's data may persuade some floating voters that previous monetary tightening has not had much effect on consumer demand,' said Alan Castle, economist at Lehman Brothers.

'We are sticking with our call for an April rate hike after this week's strong economic data and the recent stabilisation in financial markets.'

David Brown, at Bear Stearns, said the data is persuasive.

'The rise will be seen as anathema by MPC hawks who will be straining on the leash for another quick UK rate rise. 'With domestic demand running so strong and Chancellor Brown adding an extra dollop of stimulus through tax cuts, the Bank of England will see this as an additional inflation risk that needs to be capped off with higher rates.'

But while February's annual rise was the biggest since Nov 2004's 5.6 pct, the increase was distorted by a weak performance in the opening months of 2006.

'It seems fairly obvious that it is a payback story related to seasonal distortions, with clothing sales and 'other' sales (including sports shop and mobile phones) rebounding after marked weakness the previous month,' Castle added.

Howard Archer, at Global Insight, noted that while seasonal swings around Christmas and the new year can distort figures, the data points to underlying strength.

'The impression that underlying consumer spending is still pretty solid is backed up by retail sales volumes expanding by 1.1 pct on a three-month on three-month basis in February,' he said.

However, he added that a 0.3 pct year-on-year fall in the retail sales deflator suggests that retailers' pricing power is still limited, despite survey evidence suggesting retailers are looking to increase pries to improve their margins.

'This will be welcomed by the Bank of England, although we think the evidence that the consumer is still spending fairly freely increases the likelihood that the bank will raise interest rates by a final 25 basis points to 5.50 pct in May as a precautionary measure,' he said.

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