Flat sales signal slowdown

City traders took a bet yesterday that UK interest rates are about to fall after new figures showed consumers and manufacturers tightening their belts, a warning of slower economic growth to come.

Heavy discounting by retailers failed to attract customers on to the high streets last month, according to the Confederation of British Industry. Its latest snapshot of the retail sector showed sales growth was flat in October, after growing robustly the previous month and the first pause in growth since January 1999.

"Retail trading conditions are still tough and this standstill in sales highlights the fragility of the situation," said Alastair Eperon, chairman of the CBI's distributive trades panel. "Competitive pressures remain strong and price cuts continue unabated."

Manufacturing output slowed as well, according to a separate survey of the sector by the Chartered Institute of Purchasing and Supply, which showed the first decline in activity for 18 months. Although orders and output improved, the Cips activity index was dragged down by declining supply times as the delays caused by September's fuel protests lifted.

"[Manufacturing output] is keeping its head above water but only just. This certainly supports the growing feeling that rates may have peaked or that if the MPC raises rates again, it won't do so until early next year," said Fraser Coutts at 4Cast.

Traders seized on evidence the economy is slowing, pushing up short sterling futures, a market guide to future levels of UK interest rates, to signal falling rates after weeks of sitting on the fence.

A few weeks ago the market was betting that interest rates had peaked around 6% , taking its cue from a wealth of data showing subdued prices and tentative signs that economic growth was levelling off.

However, traders were reluctant to price in a cut in rates, because the members of the Bank of England's monetary policy committee voted unanimously in favour of keeping rates on hold at their October meeting.

Analysts said yesterday's figures could persuade the more dovish members of the MPC to vote for lower interest rates at their meeting next week. But the hawks will be alarmed by a sharper the expected jump in house price inflation. Nationwide building society showed house prices rising 0.9% in October, the largest monthly rise since April. Prices were 9.9% higher than a year ago.

Signs of slower growth and the prospect of rates having peaked helped send the pound to a three week low against a reinvigorated euro. Sterling fell to 59.3p against the euro, down a 0.5p from late Tuesday levels and its weakest since October 12.

The euro reached a two-week high against the dollar yesterday, closing in London above 86 cents, buoyed by further evidence the US economy is slowing after new figures showed manufacturing contracted for the third month in a row.

Traders were also wary about the risks of another coordinated euro buying spree by world central banks, after Bundesbank president Ernst Welteke and US treasury secretary Lawrence Summers both hinted at intervention.

The euro's rise against the dollar yesterday was its fifth in a row, the longest rally the single currency has sustained for more than a year. However, few traders were prepared to declare its woes are over.