By Andy Bruce and David Milliken
LONDON (Reuters) - Retail sales unexpectedly chalked up modest growth in March, bucking weak industry data and adding to signs that a consumer-led economic recovery is taking hold.
Bank lending data also pointed to improved consumer morale, showing the first annual growth in personal loans since the depths of the financial crisis, although fewer mortgages were approved as banks readied tighter lending rules.
Retail sales volumes edged up by 0.1 percent last month, the Office for National Statistics said, beating economists' expectations for a 0.4 percent decline.
That was slower than February's bumper 1.3 percent rise, but looking at the first three months of 2014 as a whole, retail sales rose 0.8 percent compared to a 0.6 percent rise in the fourth quarter of 2013.
This suggests consumer demand will continue to make a strong contribution to first-quarter gross domestic product data due on April 29, and sterling rallied to a session high against the dollar after the data.
"March's retail sales figures support the message from other indicators that the consumer recovery retains plenty of momentum," said Jonathan Loynes, chief European economist at Capital Economics.
Consumer spending has been robust over the past year despite a squeeze on real incomes from inflation rising faster than wages - something which is only now beginning to abate.
Economists expect data next week to show quarterly GDP growth picking up to 0.8 percent from 0.7 percent in the last three months of 2013, as business investment and construction also start to rebound. This is above Britain's long-run average growth rate of around 0.6 percent a quarter.
Output, however, is still below its 2008 peak - a major reason why the Bank of England has said it is in no hurry to raise interest rates from their record-low 0.5 percent.
Friday's retail sales data contrasted with surveys from the British Retail Consortium and the Confederation of British Industry, which had both reported weak sales in March due to the later-than-usual timing of Easter. The CBI has since reported a rebound in sales in April.
MORTGAGE APPROVALS FALL AGAIN
The central bank has also said it does not want to use interest rates as a first line of defence against a potential bubble in Britain's housing market, and so is likely to be relieved that banks are starting to rein back mortgage growth.
The British Bankers' Association reported on Friday that the number of mortgages approved fell in March for a second consecutive month to its lowest level since November.
At the start of this year, BBA mortgage approvals were running at their highest level since 2007, and house prices nationally are 10 percent up on a year ago.
The latest BBA data comes a day before banks are legally obliged to make more stringent checks that borrowers will be able to continue repaying mortgages after interest rates rise.
Finance minister George Osborne - who last month extended a scheme to aid buyers of newly built homes - said on Friday that the changes would "help stop irresponsible lending".
Brian Hilliard, chief UK economist at Societe Generale, said that some of March's fall in mortgage approvals might be due to banks tightening lending standards before the new rules come in, and that demand from buyers had also fallen recently.
"It's not surprising to see a little bit of a pause ... but I don't think we should call this the top of the mortgage market. It seems unlikely that there will be a step-change in banks' lending behaviour," he said.
The BBA figures also showed that banks' lending for overdrafts and personal loans rose on an annual basis for the first time since January 2009 - a sign, it said, of increased consumer confidence. Business lending continued to fall.
Consumers are also benefiting from falling prices for many goods, with the ONS reporting that lower fuel prices drove a 0.5 percent year-on-year drop in March, the biggest decline since September 2009.
Year-on-year, retail sales rose 4.2 percent in March, though the ONS said this partly reflected weak sales in March 2013 when there was very cold weather. The effect was especially marked for non-food sales, which showed their strongest annual sales growth in 12 years at 9.6 percent.
(Additional reporting by William Schomberg; Editing by Hugh Lawson)