Retail sales rise contrasts with wider gloom

By Fiona Shaikh and Christina Fincher

LONDON (Reuters) - A surprise pick-up in retail sales last month met with scepticism on Thursday, given mounting evidence the economy is deteriorating and growing belief interest rates may have to fall to zero to spur spending.

The Office for National Statistics said sales volumes rose 0.3 percent last month, confounding forecasts for a 0.6 percent decline and flying in the face of anecdotal evidence that consumers are tightening their belts.

Separate figures showed public sector borrowing hit a record high of almost 16 billion pounds last month, even before the government's recent fiscal stimulus measures kick in, heaping pressure on the pound and heightening concern over how much it will cost the UK government to fund its plans.

One possible reason for the discrepancy between official retail data and informal surveys is that the ONS figures capture internet shopping more fully.

On the High Street, stores have slashed prices to lure in shoppers as soaring unemployment, tight credit and a crumbling housing market have led Britons to clamp down on spending. A survey by the Confederation of British Industry showed sales in early December were their weakest in at least 25 years.

And a slew of profit warnings from stores, along with the collapse of High Street stalwart Woolworths with the loss of 27,000 jobs, are further proof that Britain's recent consumer-led boom has come to an abrupt end.

"The Monetary Policy Committee has already indicated that it is paying little attention to these figures and we have been taking the same approach," said Vicky Redwood at Capital Economics. "We still think that Christmas will be pretty awful for retailers and that things will get even worse next year."

Britain is probably on track for its worst recession since the early 1980s and the Bank of England has knocked 3 percentage points off borrowing costs since October to shore up demand. BoE Deputy Governor Charlie Bean said Thursday it was possible interest rates could hit zero.