Shy shoppers may negate early rate rise

The likelihood of an early rise in interest rates faded today as retail sales continued to flag at the start of the year.

According to the Office for National Statistics (ONS), the volume of retail sales in the three months to February 2005 was 0.6% lower than in the previous three months.

This followed a decrease of 0.2% in the three months to January and was the lowest since March 2003, when the lead-up to the Iraq war dampened consumer confidence.

While retail sales account for less than half of all household spending, their three-month decline occurred over a key period for retailers, where they make most of the year's sales and profits.

Some of Britain's top high street names continue to report sluggish conditions. The department store chain House of Fraser today reported that same-store sales fell 4% in the first six weeks of its current year.

Analysts said the further evidence of weakness in consumer spending made an early rise in interest rates less likely.

"The data clearly argue against an interest rate hike as early as April," said Howard Archer, the chief UK economist at consultancy Global Insight. "Household goods sales were particularly soft, which is clearly a reflection of low housing market activity."

In its February inflation report, the Bank of England cited weaker consumer spending as a major downside risk to the inflation and growth outlooks.

In today's sales report, the ONS said total sales volume grew by 0.2% between January and February and by 3.6% compared with February 2004. February sales growth was driven mainly by textiles, clothing and footwear, which rose 2.5%, the ONS said.

Non-store and repair sales, which include internet shopping, climbed 3.6% on the month, the biggest monthly gain since December 2002. But household goods sales fell 1.3%, coinciding with signs of cooling house prices after years of steep inflation in the property market.