23 January 2004, 16:37  Rates seen rising to cool sizzling British economy

LONDON, Jan 23 - British interest rates look set to hit four percent in a fortnight after new figures showed the economy roaring ahead at the end of last year and consumers splashing out on things like TVs and DVD players at Christmas. The Office for National Statistics said on Friday the world's fourth largest economy grew by 0.9 percent in the fourth quarter of 2003, the fastest rate in over three years. Retail sales jumped by more than twice the rate predicted by analysts in the key December shopping season, rising by 0.9 percent, the strongest gain since June's heatwave got Britons rushing out to buy barbecues and new summer clothes. November's 0.1 percent gain was also revised up to 0.4 percent, taking the quarterly rate of sales growth to nearly two percent, its highest in one and a half years. Economists immediately decided the already-twitchy central bank would add another quarter-point to its November rate hike at its February meeting to cool the booming housing market and soaring consumer debt levels as the economy strengthens. "Interest rates are on the way up. They could reach 4.5 percent by the end of this year," said Graeme Leach, chief economist at the Institute of Directors, a business lobby group.
The pound surged by half a cent toward 11-year highs above $1.85 immediately after the data while government bonds and interest rate futures plummeted as dealers in the financial markets priced in more aggressive rate hikes. Ed Balls, the Treasury's chief economic adviser welcomed the figures, saying they showed the economy was clearly strengthening and becoming more balanced. He also appeared to lend support to any rate rises the Bank's Monetary Policy Committee might make in the coming months. "We have backed the MPC in the decisions it has taken to lock in stability as the economy strengthens," Balls will say in a speech at York University later on Friday. The economy grew by 2.1 percent over 2003 as a whole, up from 1.7 percent the year before, exactly in line with the Treasury's forecast, having avoided recession through the recent world downturn. The German economy, by contrast, shrank 0.1 percent last year.
SHOPS HAD A MERRY CHRISTMAS
The ONS said sales rose sharply in almost all categories except for mail-order which continued the decline seen through most of the year, contrasting with the mixed picture of festive sales reported by the country's major retailers. For example, Carphone Warehouse saw revenues shoot up nearly 30 percent thanks to sales of new handsets equipped with features like cameras and bluetooth. But beauty product retailer Body Shop saw sales slump 16 percent. Analysts said the discrepancy between the mixed company results and the uniformly strong ONS picture might be down to measurement problems around Christmas and the January data should provide a clearer picture. "One should beware making too many inferences from December's retail sales figures until January's are published. Even so there are few signs of an underlying consumer slowdown," said Philip Shaw, chief economist at Investec bank in London. But the rise in sales volumes may have come at a price for retailers. The ONS reported moving their end-of-year sales earlier into December, particularly women's clothes shops, and the so-called deflator -- a measure of High Street price pressures -- fell to its lowest level since May.//

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