Surprise spree cools rate-cut hopes

THE City has all but ruled out another cut in interest rates this year after a higher-than-forecast increase in High Street sales.

Retail sales rose 1.9% last month as consumers snapped up summer clothes and barbecues amid the hottest June for 27 years.

It was the biggest one-month increase since November 2001 when sales rebounded after 9.11. The rise topped City expectations of a 0.4% increase and took the year-on-year gain to 6% - the strongest since last December.

Short sterling futures fell as dealers lengthened the odds on an early cut in interest rates. Markets are now pricing in a 40% chance of a quarter-point reduction by Christmas. The Bank of England lowered the cost of borrowing to 3.5% from 3.75% earlier this month. The pound, meanwhile, rose three-quarters of a cent to $1.6140.

Economists said news of the sales bounce, albeit triggered by good weather, would force the Bank to reassess the extent of the consumer slowdown.

'In the absence of a strong independent rise in sterling, it is difficult to see the monetary policy committee making the case for a further rate cut after these data,' said Adam Cole at Credit Agricole Indosuez.

The hottest June since 1976 boosted sales of barbecues and food. Summer clothing lines, such as cheap strappy tops and flip-flops, also sold well. Department stores did particularly well, enjoying their best performance in more than seven years. The new Harry Potter book, The Order of the Phoenix, was also reported to have lifted sales.

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