(Reuters) - Retail sales rose unexpectedly in March, helped by stronger food sales but doing little to alter a picture of fragile consumer demand that is deterring the Bank of England from raising interest rates.
Other data showed the government borrowed slightly less in the 2010/11 fiscal year than its fiscal watchdog had predicted last month, but the finance ministry said this did not lessen the need for it to press on with hefty public spending cuts.
The Office for National Statistics said retail sales volumes including automotive fuel rose 0.2 percent last month, confounding forecasts for a 0.5 percent fall, after February's 0.9 percent decline.
Analysts had been braced for a weak number after a very poor British Retail Consortium survey last week, and the pound hit a fresh 16-month high versus the dollar and strengthened against the euro after the data.
But on the quarter, sales volumes were just 0.3 percent higher, showing the sector poised to make only a modest contribution to first-quarter GDP data due next week.
"These figures and those from the last couple of months are not really showing the retail sector as being a picture of health," said Victoria Cadman, economist at Investec.
"I suspect the Monetary Policy Committee will not see this as a sign that consumer demand is gathering pace."
Year-on-year, retail sales were 1.3 percent higher. Economists had forecast a month-on-month fall of 0.5 percent and an annual rise of 0.9 percent.
The ONS said the monthly increase was driven by the strongest rise in food store sales since June. Sales at garden centres and sports good stores were boosted by better weather this March than last year. Non-store sales, which includes internet retailing, also rose strongly.
Retailers have been complaining about tough conditions on the High Street as consumers face rising prices, higher taxes and muted wage growth. The biggest public spending cuts in a generation also prompt worries about job security for many.
Supermarket chain Tesco said this week it failed to meet its UK profit expectations for the last year and expected conditions to remain challenging.
Sportswear retailer Sports Direct, however, Thursday posted higher sales and profit, helped by growth in its core UK business.
PUBLIC BORROWING DOWN
Britain is pressing on with spending cuts aimed at eliminating the budget deficit over the next four years and separate data showed the government's preferred measure of public borrowing fell to 141.1 billion pounds compared to 145.9 billion predicted at last month's budget.
"As this week's action by S&P (on the United States) has shown, concerns over deficits persist for even the largest economies, and we need to stick to our plan to pay off the nation's credit card," a Treasury spokesman said.
The Debt Management Office said it would cut the amount of bonds it will issue in 2011/12 by 1.5 billion pounds to 167.5 billion, due to the lower 2010/11 borrowing figures.
Separate figures released by the Bank of England showed that major lenders approved 44,000 mortgages for house purchase in March, up from 43,000 in February.
Despite the modest rise, approvals are still running at around half their long-run levels. The net lending flow tobusinesses fell by 0.4 billion pounds in February, versus a 2.7 billion pound decline in January.
"The housing market clearly is still very weak, which does not bode well for house prices," said Howard Archer, economist at IHS Global Insight.
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