Sagging sales raise rate hopes

Gloom on the high street and in motor car showrooms could bring respite to mortgage borrowers by strengthening the Chancellor's case for keeping interest rates on hold.

That was the City's interpretation of evidence that retail sales were much weaker than expected in April. Car production for the home market also fell back 5 per cent in April compared with a year ago.

"The chances that the Chancellor will choose to ignore the Bank's advice when they next meet in June have clearly increased," said Adam Cole, an economist at James Capel.

This view was backed by the behaviour of the short sterling contract, used by City firms to bet on interest rates. The settlement price indicated a growing perception that there may be no rise in June.

The British Retail Consortium called upon the Chancellor to avoid an increase in interest rates "for as long as possible" .

James May, its director-general, described the retail market as "highly competitive and particularly difficult for small traders".

Instead of bouncing back by about 0.5 per cent as generally expected, retail sales in April fell by 0.2 per cent on the level reached in March. What is more, the March figure was itself revised down by 0.3 per cent. Compared with the figure the Chancellor and the Governor had in front of them when they last met on 5 May, retail sales have therefore slipped by half a percentage point.

The fall came as a surprise after the pick-up in sales painted by the CBI Distributive Trades survey last week. It means the volume of retail sales is no higher than nine months ago.

As before, the slack picture may be partially attributable to the advent of the National Lottery, as consumer spending is redirected into gaming expenditure not classified as retail sales. This time, the culprit may be the launch of instant scratch cards. These started in the final week of March, and their full impact will only have come through in April.

Net of prize money, weekly ticket sales of the new cards account for about three quarters of a per cent of average weekly retail sales.

"It is quite conceivable," suggested Adam Cole, "that the introduction of these cards reduced the volumes of retail sales in April by around half a per cent."

However, looking at the figures on a three-month basis, the knock-on effect on the high street from a depressed housing market emerges as the principal villain. Retailers selling household goods such as carpets and washing machines, typically bought when people move house, were worst affected.