Shopping surge in August boosts British rate hike bets

* August retail sales +1.0 pct m/m vs +0.2 pct forecast

* Sterling jumps, 10-year gilt yields highest since Feb

* Retailer Kingfisher says sales of high-cost items steady

* BoE (Shenzhen: 000725.SZ - news) survey reports consumer weakness, peak of inflation

effect

* OECD predicts UK growth will slow to 1.0 pct in 2018

(Adds fresh market and economist reaction)

By David Milliken and William Schomberg

LONDON, Sept 20 (Reuters) - British retail sales

unexpectedly surged in August, boosting chances the Bank of

England will raise interest rates for the first time in a decade

at its next meeting.

More downbeat news, however, came from a BoE survey which

showed no sign that wages were likely to grow much more quickly,

tempering a jump in sterling.

The Organisation for Economic Co-operation and Development,

meanwhile, said uncertainty about Brexit meant Britain next year

will suffer its slowest growth since the financial crisis.

The contrasting signals underscored the challenge for the

BoE which last week surprised investors by saying it was likely

to raise rates in the coming months if the economy and inflation

pressures strengthen as expected.

That change of gear by the BoE came despite the uncertainty

about Britain's withdrawal from the European Union and mixed

messages about the strength of the economy.

Wednesday's official data showed a sharp pick-up in monthly

sales growth in August, despite inflation pressures that have

previously squeezed spending.

Retail sales volumes rose 1.0 percent month-on-month, their

fastest since April, to give an annual growth of 2.4 percent,

both well above the highest forecasts in a Reuters poll.

More Britons holidaying at home and more foreign visitors,

reflecting the weaker pound since the Brexit vote, could be

behind some of the rise, economists said.

Shoppers spent heavily on non-essentials, despite rising

prices, with strong demand for watches and jewellery.

"These latest figures will give further encouragement to the

Bank of England to follow up their recent statements on the need

to raise interest rates," Andrew Sentance, a former BoE

policymaker who now advises accountants PwC, said.

HSBC said market pricing for a quarter-point rate rise on

Nov. 2, after the BoE's next meeting, rose to 65 percent.

Sterling gained almost a cent against the U.S. dollar

after the data, before later giving back most of its gains.

British retail data is frequently volatile on a monthly

basis and a separate survey released by the BoE on Wednesday

offered a more downbeat picture.

Construction and consumer-facing industries were suffering

and there were mixed signals on investment, although factory

exports and business-to-business services were strong.

Pay rises mostly remained at 2-3 percent, below inflation

but there were some signs that the worst of the impact on prices

of last year's fall in the pound should start to ease.

INFLATION SQUEEZE PEAKING?

The loss of disposable income this year caused the weakest

first quarter for retail sales since 2010. But companies have

reported little slowdown in spending so far.

Kingfisher (Amsterdam: KF6.AS - news) , Britain's biggest home improvements

retailer, said sales of expensive power tools and new kitchens

had not changed, though it was cautious about the outlook.

The OECD said British growth will slow from 1.6 percent this

year to 1.0 percent in 2018, weaker than the BoE and most

economists expect. It would be the slowest growth since the 2009

recession.

The BoE said last week that Brexit as well as longer-term

problems mean the pace at which Britain's economy can grow

without generating excessive inflation -- and requiring higher

interest rates -- has fallen.

HSBC economist Liz Martins said Wednesday's data raised the

chance of stronger than expected growth, making a rate hike in

November even more likely.

"The Bank sounded comfortable enough about raising rates in

November on an assumption of 0.3 percent growth in the third

quarter. If the number is higher, then it will be even more."

she said.

(Reporting by David Milliken and William Schomberg. Editing by

Jeremy Gaunt)