Muted retail sales growth eases rates pressure

Sluggish retail sales figures yesterday reinforced expectations that the economy is cooling and interest rates may have peaked at 6%.

The office for national statistics said retail sales grew by 0.4% in May, half the rate expected in financial markets. Economists had expected a sharp rebound following a weather-induced fall in sales last April.

John Shepperd, economist at Dresdner Kleinwort Benson, said: "We're in deflation territory here so from the perspective of the monetary policy committee it couldn't be better: a slowing trend of final demand and strong competitive pressure on prices keeping inflation low."

The picture of slowing economic growth was strengthened by the quarterly retail sales data, which give a better idea of the underlying trend than volatile monthly figures.

The ONS said retail sales grew by 0.2% in the latest three months compared with the previous three, the slowest increase since December 1998.

News of the modest growth in sales volumes came a day af ter evidence of a sharp slowdown in average earnings, which are closely monitored by the central bank for signs of inflationary pressure.

The increase in average earnings dropped from 5.7% to 5.1% in the three months to April compared to a year ago, their biggest fall since March 1993.

But Michael Saunders of Schroder Salomon Smith Barney Citibank warned against assuming that the next move in interest rates would be down.

He pointed out that total consumer spending was rising faster than retail sales, that industrial production was sharply up in April and unemployment was continuing to fall. "We doubt that GDP growth will slow sustainably to trend without higher base rates."