High Street boom falters as retail sales fall

An interest rate rise next month is off the cards, economists predicted yesterday following another day's gloomy trade on the stock market and news of a surprise fall in retail sales.

Government figures from National Statistics revealed a 0.6 per cent month-on-month fall in retail sales – the largest decline since February 2000 – restricting annual sales growth to 5.4 per cent.

The unexpected decline in the monthly rate of retail sales growth combined with a further sell-off in the banking, telecoms and media sectors to leave the FTSE 100 index 1.6 per cent – or 72.1 points – lower at a nine-month closing low of 4,580.3. It was the third consecutive session in which the index closed lower.

The 0.6 per cent monthly fall in sales on the high street compared with a revised 1.8 per cent surge in April, when the unusually hot weather tempted shoppers to splash out early on summer clothes and shoes. Economists had been expecting a 0.3 per cent fall for May.

Sales of household goods, however, were higher in May with anecdotal evidence pointing to a jump in the sale of wide-screen televisions ahead of the World Cup.

National Statistics warned the seasonally-adjusted figures for May should be interpreted with caution due to the altered timing and number of bank holidays last month. It said the quarterly sales figures may prove more meaningful.

In the March to May quarter, high street sales were 1.9 per cent up on the previous three months, the biggest jump since May 1997, and 6 per cent higher than in the comparable quarter last year.

Economists changed tack after seeing the weak retail sales data and the fresh fall in equities. They said the new evidence – combined with other recent news on the state of the economy – would delay a rate rise by at least a month.

Many had expected the Bank of England's rate-setting Monetary Policy Committee to lift the base rate by 25 basis points next month from its 38-year-low of 4 per cent.

David Hillier, an economist at Barclays Capital, said: "There is no getting away from the fact that May's sharp drop in sales is the sort of headline figure that will probably make most MPC members think it is right to keep rates on hold for another month."

John Butler, an economist at HSBC, who also shifted his prediction of a rate rise back by a month to August, said: "For an MPC that appears to be seeking excuses to keep rates unchanged, the fall in inflation [revealed earlier this week], retail sales and most importantly equities provides an opportunity to delay the first rate hike."

Manufacturers, meanwhile, took another small step on the road to recovery with orders this month improving slightly. The CBI's monthly trends survey, however, showed orders remained below trend with 18 per cent of companies' orders above normal, while 35 per cent were below normal. The balance of minus 17 per cent was an improvement on the minus 26 per cent recorded in May.