Feb. 19 (Bloomberg) -- U.K. retail sales rose a more-than- expected 0.6 percent last month and mortgage lending surged the most in two years, increasing the chances the Bank of England will raise interest rates again. Sales in January climbed for a sixth straight month and followed a 0.8 percent increase in December, the Office for National Statistics in London said. Economists had predicted a gain of 0.1 percent last month. Mortgage lending rose by 5.9 billion pounds ($11 billion) last month, the biggest rise since November 2001, the British Bankers' Association said.
``It absolutely puts paid to any view that consumer spending or confidence is softening,'' said John Butler, a former Bank of England economist now at HSBC Holdings Plc. The bank may need to be `` more aggressive than its current gradual approach to raising rates if it wants the consumer to listen.'' The U.K. central bank raised the benchmark lending rate on Feb. 5 for a second time in four months, citing the ``unexpected resilience'' of household spending. Soaring house- price growth, which policy makers say is unsustainable, has prompted concern that consumers are borrowing excessively.
British shoppers and homebuyers have helped Europe's second- largest economy grow faster than its European counterparts where higher unemployment has made consumers more cautious. German retail sales have fallen for two consecutive months, while French consumer spending barely grew in December after dropping the month before.
`Surprisingly Strong'
From a year ago, U.K. retail sales soared 6.4 percent in January, the most since December 2002, following a 3.6 percent increase the month before. The ``surprisingly strong'' retail sales ``may point to a sooner than expected decision by the Bank of England to raise interest rates,'' said Andrij Halushka, an economist at the Centre for Economics and Business Research Ltd. A Bloomberg Survey last week showed all but one of twenty three economists predicted rates would rise in May. Futures markets suggest investors expect U.K. policy makers to raise borrowing costs again by the middle of this year. The yield on the three-month futures contract maturing in June was 4.40 percent at 11:53 a.m. in London, compared with the current money-market rate of 4.16 percent.
Last month's gain was led by mail-order company sales. Non- food stores including photography retailers also benefited after selling more digital cameras, the statistics office said. The total value of January sales was estimated at 17.2 billion pounds ($32.5 billion), 5.6 percent higher than a year ago, the biggest increase since November 2002. Retail sales rose 1.7 percent in the quarter to January from the previous three months, and 4.5 percent from the same period a year earlier, the statistics office said. The data was collected between Jan. 4 and Jan. 31.
Retailers' Profit
British retailers have profited as rising house prices encouraged consumers to borrow and spend. Kingfisher Plc, the world's No. 3 home-improvement retailer, which draws nearly two thirds of its revenue in the U.K., said sales growth picked up in the three months through January. Pendragon Plc, the U.K.'s largest car dealer group, said 2003 profit rose 27 percent. ``There are some challenges to consumer spending coming from taxation, pension increases and the upward trend in interest rates, but they are gradual changes,'' Kingfisher chief executive Gerry Murphy said yesterday on a conference call. The consumer climate is ``reasonably stable,'' he said. Net personal lending, which comprises mortgage lending, borrowing on credit cards and overdrafts, increased by 6.6 billion pounds in January, compared with 6.1 billion pounds in December, according to the BBA, which represents banks including HSBC, Barclays Plc and Abbey National Plc.
`Too Soon'
``It is too soon to see any impact of the latest quarter- point rise in interest rates on mortgage demand, but the major banks continued to see above trend mortgage lending in January,'' said David Dooks, the BBA's director of statistics. Bank of England Governor Mervyn King has said he and Deputy Governor Andrew Large are concerned that consumers may be borrowing too much. Rachel Lomax, the bank's other deputy governor, last night said house-price growth can't be sustained after report by HBOS Plc, the U.K.'s No.1 mortgage-lender, showed January prices grew near the fastest pace in a year.
House-price gains, which propelled Britons to borrow at record rates in the fourth quarter, may be re-accelerating and bolstering consumer confidence. An index of consumers' optimism about the housing market rose in January to 59 percent from 56 percent in December, according to The Woolwich, a unit of Barclays Plc. Andy Gray, Barclays' head of mortgages, said interest rates would have to rise by a further 0.5 percent before confidence was dented. Britain's economy, where unemployment is at a 28-year low, grew 0.9 percent in the fourth quarter, three times the rate of expansion enjoyed by the 12 nations using the euro. //www.bloomberg.com