Sales rise adds to rates dilemma

High street sales in the UK showed signs of revival in July, according to a new survey and that news could signal a rise in interest rates.

The Confederation of British Industry (CBI) figures were released on the day that experts on the Bank of England's Monetary Policy Committee (MPC) gathered in the heart of the City of London.

It strengthens our view that the MPC should leave interest rates on hold

Kate Barker, CBI

The nine MPC members started their monthly interest rate setting meeting on Wednesday, with a decision due to be announced at noon on Thursday.

During the course of the two day meeting they look at all aspects of the UK economy's performance before deciding on an interest rate change to ensure that inflation remains close to 2.5%.

The CBI's distributive trades survey reported shop sales had picked from what had been a poor June.

But the pace of growth was still slower than it was in the spring.

Book sales

A total of 47% of retailers reported increased sales volumes in July compared with a year ago.

Only 23% of retailers suffered from falling sales. The overall increase was above June's figures but below growth levels reported in April and May.

Household goods, footwear, leather and food retailers showed the sharpest growth.

Booksellers also saw a marked increase in sales, although specialist food retailers and chemists struggled to attract shoppers.

But in a plea to MPC members the CBI's chief economic advisor, Kate Barker, maintained that the growth was not strong enough to prompt an interest rate rise.

No change, for now

"Not all sectors experienced a sharp increase in sales. Clothing, furniture, carpets and hardware, china and DIY reported only slight growth," she said.

"The latest data suggests that the pace of retail sales growth is cooling. It strengthens our view that the MPC should leave interest rates on hold," she said.

A majority of economists predict that there will be no rate increase this month.

However there is a growing belief that this may merely be a delaying of the inevitable.

Neil Parker, an economist at the Royal Bank of Scotland, said Wednesday's figures and the CBI's request would help reduce the impact of strong second quarter growth figures last week.

However, "we believe there is still a risk of a further 25 basis point rate hike," he said.