British retail sales unexpectedly jumped in August, stunning financial markets prepared for a drop, and suggesting that the Bank of England is likely to raise interest rates again later this year. The Office for National Statistics said on Thursday that retail sales rose 0.6 percent last month versus expectations of a 0.3 percent fall and reversing July's revised 0.6 percent drop. That brought the year-on-year rate up to 6.5 percent. Market expectations in recent weeks have been moving toward interest rates peaking at the current 4.75 percent after softer retail and housing data that suggested the economy is slowing down following five rate rises since November. On Wednesday, BoE Monetary Policy Committee member Stephen Nickell said that rates may not have to rise much further if the weaker trend continued. But interest rate futures plunged and sterling gained nearly half a cent against the dollar immediately after the August sales figures were released as they strengthened the possibility that the BoE will rates by another quarter point by the year-end.
"It will certainly challenge the prevailing view in the market that the UK interest rate cycle is at or near its peak," said Steve Pearson, economist at HBOS. "We continue to look for another rate hike in November." August figures are always more difficult to interpret because of holidays, but the latest sales data show that the British consumer is still disposed to spend, even after the five interest rate hikes since November. Still, the quarterly growth rate slipped to 1.4 percent from 1.8 percent in the three months to July. That was the lowest since September last year.
CLOTHING UP
The monthly gains were led by sharp rises for clothing and footwear and department stores. Textile, clothing and footwear sales jumped 3.7 percent on the month, their biggest increase in more in than a year. That stands in sharp contrast to survey evidence that suggested that exceptionally wet weather in August had kept Britons away from shops, particularly clothing stores. Fashion retailer French Connection said earlier this week that retail conditions last month were "unusually poor". But the rise in sales may have been a result of retailers not lifting their prices as much as they usually do in an attempt to draw in shoppers. The retail sales price deflator fell to its lowest since March last month, to -1.4 percent from -1.3 percent. B&Q, one of Britain's top home improvement chains and owned by Kingfisher , said earlier on Thursday that good growth in kitchens, bathrooms and electricals offset weakness in more seasonal ranges such as garden furniture and exterior decoration.///