Strong UK retail sales reinforces rate hike predictions

LONDON — Retail sales in Britain rose far more than anticipated during August, official figures showed Wednesday, further reinforcing expectations that the Bank of England will raise interest rates in November for the first time in a decade.

The Office for National Statistics said retail sales rose 1 percent from the previous month, largely driven by business online and in department stores. The increase was ahead of market expectations for a modest 0.2 percent gain and means retail sales have risen for three months in a row, the first such sequence since the spring of 2015.

The figures pushed up the value of the pound, as traders think the Bank of England is now even more likely to raise interest rates in November. By mid-morning in London, the currency was up 0.4 percent at $1.3550.

"The data points to stronger consumer spending, which should support growth estimates and lessen fears of a slowdown in the U.K. economy in the second half of the year, all of which is broadly supportive of an interest rate hike before the end of the year," said Neil Wilson, senior market analyst at ETX Capital.

Last week, the Bank of England's policymaking panel hinted that it may raise its main interest rate from the record low of 0.25 percent in November. The main motivation relates to inflation, which has spiked to an above-target annual rate of 2.9 percent, largely due to the fall in the pound since the vote to leave the European Union, which made imported goods like food and energy more expensive. Higher inflation is one reason why consumer spending slowed down sharply in the first half of the year.

Though Wednesday's figures suggest that consumers continue to hit the shops, economists said the outlook remains murky, not least because of the uncertainty surrounding Brexit.

Samuel Tombs, chief U.K. economist at Pantheon Macroeconomics, says the outlook for retail sales still looks "challenging" amid low wage increases and a slowdown in the housing market. As such, he thinks the Bank of England will hold off from raising interest rates in November.

"Today's data are not the final word," he said.

The mixed outlook for the British economy was evident in the latest forecasts from the Organisation for Economic Co-operation and Development. It's expecting British growth to falter next year to just 1 percent from 1.6 percent this year, which would make the British economy the slowest-growing among the Group of Seven industrial nations.

"The previously identified growth slowdown is expected to continue through 2018, while uncertainty remains over the outcome of negotiations around the decision to leave the European Union," it said.

Also Wednesday, the Federation of Small Businesses said Britain's small businesses are more pessimistic than at any time since the immediate aftermath of last year's Brexit vote. In a quarterly survey, the group warned that confidence among its members has tumbled amid "unprecedented political and economic uncertainty."

"Rising inflationary pressure and a weakening domestic economy are the twin drivers of plummeting confidence among small firms and consumers alike," said Mike Cherry, the organization's national chairman.