LONDON (Reuters) - An early summer heatwave sent Britain on a shopping spree in May, driving retail sales up at the sharpest pace in more than two decades, boosting expectations the Bank of England will raise interest rates.
Policymakers, so far, have signalled they are in no rush to hike rates, despite inflation fears, because the economy is expected to slow sharply as the credit crunch feeds through to households.
The Bank expects consumer spending to tail off as pay growth stalls and banks clamp down on lending, but official retail sales data on Wednesday defied all expectations — showing a 3.5 percent leap in volumes during May.
That was the strongest since the series began in 1986 and left analysts, who had expected a slight fall, dumbstruck.
“I’m staggered,” said Philip Shaw, chief economist at Investec. “The figures are on a completely different plane compared to what markets were expecting.”
Official sales data has been surprisingly strong this year, puzzling policymakers and deviating from weaker evidence elsewhere.
But the longer the official numbers defy expectations, the more confident markets will grow in betting on higher interest rates.
Record sales of food and clothing, undoubtedly helped by the hottest weather for May on record, contributed most to the knockout performance — but there was strength across the board.
Household goods sales — an indication of how prepared Britons are to part with larger sums of cash — rose 2.6 percent on the month.
Shops did not need to slash prices anywhere near as heavily as they have had to in recent months to get consumers spending, with the measure of discounting at its tamest in nearly a year.
The average value of weekly sales was also strong, up 7 percent on a year ago to 5.3 billion pounds.
Markets reacted swiftly to price in interest rate rises in the next few months with the pound jumping nearly a full cent against the dollar. Many analysts have been expecting the Bank to cut rates later this year to shore up a slowing economy.
Retailers such as supermarket chain Sainsbury’s and general store Woolworths have bemoaned challenging conditions while Britain’s biggest retailer Tesco complained of “very cautious” consumers earlier this month.
Some analysts said May’s bumper sales raised questions about the accuracy of official data.
“A big surprise,” said Mark Miller, economist at HBOS. “It may very well be a weather-related issue for this particular month, but it’s very difficult to see a strong trend in retail sales persisting throughout the year.”
Bank of England Governor Mervyn King said late on Wednesday the economy was already slowing sharply, as it would have to in order to tame rising inflationary pressures.
Evidence that demand remains robust could push policymakers into early interest rises to bring the inflation rate down to the central bank’s 2 percent target.
Separately, the ONS said public sector borrowing rose more than expected in May. The public sector net cash requirement was the highest for that month since the series began in 1984.
The government’s preferred accruals-based measure showed the highest borrowing for a May since that series began in 1993 and the second highest figure for any month.
“It seems certain that the next government will inherit an unhealthy fiscal situation and immediately have tough decisions to make on taxes and public spending,” said Howard Archer, an economist at Global Insight.
The next election is due by May 2010, with the Labour party facing a real risk of defeat to the resurgent Conservatives.
Editing by Malcolm Whittaker