September 20, 2017 / 9:39 AM / a year ago

UPDATE 2-Shopping surge in August boosts British rate hike bets

    * August retail sales +1.0 pct m/m vs +0.2 pct forecast
    * Sterling jumps, 10-year gilt yields highest since Feb
    * Retailer Kingfisher says sales of high-cost items steady
    * BoE survey reports consumer weakness, peak of inflation
    * OECD predicts UK growth will slow to 1.0 pct in 2018

 (Adds fresh market and economist reaction)
    By David Milliken and William Schomberg
    LONDON, Sept 20 (Reuters) - British retail sales
unexpectedly surged in August, boosting chances the Bank of
England will raise interest rates for the first time in a decade
at its next meeting.
    More downbeat news, however, came from a BoE survey which
showed no sign that wages were likely to grow much more quickly,
tempering a jump in sterling.
    The Organisation for Economic Co-operation and Development,
meanwhile, said uncertainty about Brexit meant Britain next year
will suffer its slowest growth since the financial crisis.
    The contrasting signals underscored the challenge for the
BoE which last week surprised investors by saying it was likely
to raise rates in the coming months if the economy and inflation
pressures strengthen as expected.
    That change of gear by the BoE came despite the uncertainty
about Britain's withdrawal from the European Union and mixed
messages about the strength of the economy.
    Wednesday's official data showed a sharp pick-up in monthly
sales growth in August, despite inflation pressures that have
previously squeezed spending. 
    Retail sales volumes rose 1.0 percent month-on-month, their
fastest since April, to give an annual growth of 2.4 percent,
both well above the highest forecasts in a Reuters poll.
    More Britons holidaying at home and more foreign visitors,
reflecting the weaker pound since the Brexit vote, could be
behind some of the rise, economists said.
    Shoppers spent heavily on non-essentials, despite rising
prices, with strong demand for watches and jewellery.
    "These latest figures will give further encouragement to the
Bank of England to follow up their recent statements on the need
to raise interest rates," Andrew Sentance, a former BoE
policymaker who now advises accountants PwC, said.
    HSBC said market pricing for a quarter-point rate rise on
Nov. 2, after the BoE's next meeting, rose to 65 percent.
    Sterling gained almost a cent against the U.S. dollar       
after the data, before later giving back most of its gains.
    British retail data is frequently volatile on a monthly
basis and a separate survey released by the BoE on Wednesday
offered a more downbeat picture.
    Construction and consumer-facing industries were suffering
and there were mixed signals on investment, although factory
exports and business-to-business services were strong. 
    Pay rises mostly remained at 2-3 percent, below inflation
but there were some signs that the worst of the impact on prices
of last year's fall in the pound should start to ease.
    The loss of disposable income this year caused the weakest
first quarter for retail sales since 2010. But companies have
reported little slowdown in spending so far.
    Kingfisher        , Britain's biggest home improvements
retailer, said sales of expensive power tools and new kitchens
had not changed, though it was cautious about the outlook.
    The OECD said British growth will slow from 1.6 percent this
year to 1.0 percent in 2018, weaker than the BoE and most
economists expect. It would be the slowest growth since the 2009
    The BoE said last week that Brexit as well as longer-term
problems mean the pace at which Britain's economy can grow
without generating excessive inflation -- and requiring higher
interest rates -- has fallen.
    HSBC economist Liz Martins said Wednesday's data raised the
chance of stronger than expected growth, making a rate hike in
November even more likely.
    "The Bank sounded comfortable enough about raising rates in
November on an assumption of 0.3 percent growth in the third
quarter. If the number is higher, then it will be even more."
she said.

 (Reporting by David Milliken and William Schomberg. Editing by
Jeremy Gaunt)
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