U.K. Retail Sales Increased the Most in Five Months in July


U.K. retail sales rose by the most in five months in July as stores cut prices, a sign higher interest- rates have yet to affect consumer spending.

Sales climbed 0.7 percent after gaining 0.4 percent in June, which was twice as much as previously reported, the Office for National Statistics said today in London. Economists forecast 0.1 percent, the median of 32 predictions in a Bloomberg News survey showed. Shop prices dropped on the year by the most in 15 months.

The report adds to evidence that Britons' spending has stayed resilient to higher borrowing costs, encouraged by gains in house prices and falling unemployment. The central bank is looking for signs of a weaker consumer in determining whether a further increase in borrowing costs is needed to slow the economy and keep a lid on inflation.

“I don't expect higher rates to affect consumer spending in the third quarter,'' said Michael Saunders, chief Western European economist at Citigroup Inc. in London. “But a slowdown in consumption should cool economic growth by the first part of next year. The outlook for interest rates is genuinely uncertain.''

Investors have pared bets of further increases in the central bank's key rate after five to the current 5.75 percent. The implied rate on the March interest-rate futures contract was at 5.92 percent at 8:46 in London, down from 6.24 percent on Aug. 8.

The contract settles to the three-month London interbank offered rate for the pound, which has averaged 15 basis points more than the central bank benchmark for the past decade.

Electronics, Furniture

The gain in retail sales was led by electronics and furniture, the statistics office said. Household goods stores reported a 13.4 percent annual increase in sales, the biggest since October 2001. From a year earlier, retail sales rose 4.4 percent.

U.K. economic growth accelerated in the second quarter, encouraging companies to hire more workers. Jobless claims fell to the lowest since May 2005 last month, the statistics office said yesterday.

Some stores brought forward plans to discount goods, helping to drive the surge in sales in July. The retail deflator, a measure of shop prices, fell an annual 1.1 percent, the most since April 2006, the statistics office said.

Kesa Electricals Plc, Europe's third-largest electronics retailer, last month reported higher sales in the 24 weeks through July 18, helped by demand for flat-screen televisions in the U.K.

Confidence `Uncertain'

Chief Executive Officer Jean-Noel Labroue still said that consumer confidence in the U.K. will be “uncertain.''

Higher interest rates are increasing mortgage payments for many homeowners and making it more expensive for Britons to service a record 1.3 trillion pounds ($2.6 trillion) of debt. After property values rose about 10 percent last year, expectations for prices fell to the lowest since 2006 last month, the Royal Institution of Chartered Surveyors said Aug. 14.

Heavy rain also affected shopping. Tracts of England from Yorkshire in the North, Gloucester in the west to the outskirts of London were inundated after the heaviest rainfall for the period of May through July since records began in 1766.

Food sales barely rose in July, with a 0.1 percent gain, the statistics office said. Kingfisher Plc, Europe's biggest home- improvement retailer, said July 26 that sales growth slowed as the rain lowered demand for barbeques and garden furniture.

Policy makers said at the Aug. 1-2 rate meeting that it's “too early'' to say whether rate increases in the past year have started to hurt spending, minutes of their decision showed yesterday. Consumers may be resilient and the “unusual weather'' may have created volatility in retail sales, the report said.

The bank may raise interest rates again to slow growth and ease price pressures. Inflation reached a decade high in March and then unexpectedly slowed to 1.9 percent last month, falling below the 2 percent target for the first time since March 2006.

“The issue for another rate rise is whether consumers pull back enough,'' said Kevin Grice, an economist at American Express Bank in London. “They're like a supertanker that turns very slowly.''