June 7 (Bloomberg) -- European retail sales rose in May by the most in two years, the eighth indicator this month to show economic growth is accelerating as the region's central bank prepares to raise interest rates.

A seasonally adjusted index of retail sales climbed to 56.3, the highest since the survey began in January 2004, from 54.6 in April, according to a survey for Bloomberg LP by NTC Economics Ltd. A reading above 50 signals an expansion of consumer spending, which accounts for more than half the economy of the dozen nations sharing the euro signals expansion.

Spending on goods including flat-screen televisions ahead of this month's soccer World Cup in Germany is buttressing economic expansion that has been driven by exports and company investment. The European Commission on June 1 raised its growth forecast for the rest of this year. The European Central Bank is set to raise interest rates for the third time in six months tomorrow to keep a lid on price increase.

``There are growing signs that the consumer is coming to life, having long been the weak link in the region's upturn,'' said Howard Archer, chief European economist at Global Insight in London, who expects the ECB to lift its benchmark rate to 3.25 percent by the end of the year from 2.5 percent today.

European bonds fell for a third day, sending two-year yields close to their highest since September 2002, as the report cemented expectations that the ECB will increase borrowing costs.

Retail sales in the euro nations rose 2.8 percent in April from a year earlier, Eurostat, the European Union's statistics office, said today.

Valentino's Gains

``European sales are still performing well for us,'' Valentino SpA Chief Executive Officer Michele Norsa said yesterday in an interview. ``Valentino is seeing double-digit increases in Europe.'' Norsa said sales are being lifted by consumers from Russia and other eastern European countries who travel to western Europe to shop for luxury labels they can't buy at home.

ECB President Jean-Claude Trichet said last month that higher interest rates are ``warranted.'' The U.S. Federal Reserve has increased its benchmark rate 16 times since the middle of 2004 to 5 percent. Speculation that central bankers will raise rates further to contain inflation has pushed down global stocks. The Dow Jones Stoxx 600 Index lost 9 percent since reaching a five- year high on May 9.

The jobless rate in the euro region fell to 8 percent in April, the lowest in four years, helping boost the German and French retail sales indexes to records, NTC said. The European Commission last week forecast the fastest economic growth since 2000 in the final three quarters of this year as industry surveys showed services and manufacturing growth accelerated in May.

World Cup Effect

The retail index in Germany, Europe's largest economy, jumped to 60.4 from 59.3, as the country anticipated the soccer World Cup, Henley-on-Thames, U.K.-based NTC said. Held every four years, the tournament helped boost May sales, retailers told NTC.

``People have started to spend again and I'm very optimistic about the rest of the year,'' said Michael Otto, who runs an Edeka supermarket in Hamburg, northern Germany.

Royal Philips Electronics NV, Europe's largest consumer electronics maker, has added a night shift at a plant in Belgium to help meet demand for flat-screen TVs. Herzogenaurach, Germany- based Adidas AG, the world's second-largest sporting-goods maker, said May 9 first-quarter profit rose 37 percent, beating analysts' estimates, on higher demand for soccer clothing.

``Football is most definitely the most spectacular product at the moment because of the World Cup,'' Adidas Chief Executive Herbert Hainer said in an interview on May 9.

Hermes Sales

In France, the gauge climbed to 56.9 from 55.2 and Italy's gauge rose to 49.3 from 46.8.

Paris-based Hermes International SCA, the maker of Kelly and Birkin handbags, said on May 11 first-quarter sales increased 11 percent as European consumers bought more of the company's leather goods, clothes and accessories.

A gauge of planned and likely sales rose to 62.2 from 60.5, signaling retailers remained optimistic, expecting to meet their targets in June. The employment index rose to 51.3, the highest rate on record, from 50.5.

``Though the year started off slowly, sales now are becoming more in line with our forecasts,'' said Sauro Pedetti, store director of cooperative market Coop Centro Italia in Umbria, Italy. ``With the economy hopefully picking up, we expect sales to increase at a steady rate.''

Profit Erosion

Rising costs and discounting eroded profits, NTC said. A gauge of gross margins rose to 46.1, indicating a continued profit squeeze, from April's 44.8. The purchase price index stayed at 58.4, NTC said.

Rome-based Bulgari SpA, the world's third-largest jeweler, said May 18 it plans to raise prices of its jewelry and watches to reflect an increase in the cost of gold.

The ECB forecasts inflation above its 2 percent ceiling for a seventh year in 2006 as higher oil prices and a strengthening economy spur wage demands.

Investors expect the ECB to increase the benchmark rate to at least 3.25 percent by the end of this year from the current 2.5 percent, futures trading shows. The yield on the three-month contract for December settlement was at 3.53 percent, compared with 3.22 percent on March 1.

``The ECB will certainly find in today's report another reason to raise rates by 25 basis points this week,'' said Marco Valli, an economist at UniCredit Banca Mobiliare SpA in Milan, adding there's a 30 percent chance that the ECB will increase its key rate by 50 basis points.

The contracts settle to the three-month inter-bank offered rate for the euro, which has averaged 15 basis points more the ECB rate since the currency's launch in 1999.

For the Bloomberg retail indicator, NTC recruited a representative panel of retail companies in Germany, France and Italy, which together make up 80 percent of total euro-region retail sales by value. The panel includes large chain retailers as well as smaller stores.

To contact the reporter on this story: Dara Doyle in Dublin at ddoyle1@bloomberg.net.

Last Updated: June 7, 2006 08:34 EDT