Retail boom grinds to a halt

Britain's homeowners could be spared a rise in interest rates this year after official figures showed that the spending spree on the high street has ended.

The deepest discounts since records began were not sufficient to tempt consumers into the shops in June, with retail sales falling for the second month in a row.

City analysts said Britain's long-running consumer boom appears to be fading, lifting the threat of an interest rate rise to slow spending.

The market is now not expecting any rise in borrowing costs until 2003, with some analysts suggesting falling share prices could force the Bank of England and its US counterpart into confidence boosting rate cuts.

But in London yesterday the FTSE index of leading shares shrugged off the recent gloom to record its strongest one-day gain in more than 10 years, after Wall Street's huge rise on Thursday night. The index closed up 188.8 points at the day's peak of 3,965.9, a 5% rise.

Sales in the shops were 0.7% lower last month than in May, according to national statistics - the sharpest fall since February 2000, and the first time they have fallen for two months in a row since autumn 1998.

The British Bankers Association said the quiet month on the high street was matched by a slowdown in borrowing. Members approved 17% fewer mortgages than June last year.

Consumers also stacked up less debt on their credit cards, with spending at its lowest level for four months - 14% down on May.

After yesterday's downbeat news, City commentators agreed that the Bank's monetary policy committee would leave interest rates at 4% when it meets on Thursday - and perhaps for the near future.

"Even without another precipitous drop in shares, the MPC is likely to have little excuse to raise base rates until the second quarter of next year at the earliest," said Simon Rubinsohn of City brokers Gerrard.

Retailers' poor performance was all the more worrying as it came despite widespread price-cutting. Backing up last week's news of record-low inflation, national statistics put average shop prices in June at 2% lower than a year ago, suggesting the summer sales may have started early this year.

Statisticians said spending had been depressed by rainy weather, and key World Cup matches, and that many smaller shops had shut down for the jubilee bank holiday.

Some economists said that sales would bounce back in July, and pointed out that underlying growth was still relatively strong, with sales in the three months to June 1.7% higher than January to March.

"Once the one-off effects are accounted for, the underlying trend is still positive," said Alan Castle of Lehman Brothers. "Looking ahead our research has shown that sales volumes tend to rebound in the month following a World Cup."

But even if consumers made up for lost shopping time this month, analysts said the sell-off in the markets since June could put renewed downward pressure on spending.

"It would be astonishing if households were unaffected by the sharp falls in the stock market and, with income growth slowing and debt burdens heavy, there are some very good reasons to expect spending growth to slow quite sharply over the next year or so," said Jonathan Loynes of Capital Economics.

Household goods stores saw the largest fall in sales, of 4.3%, while clothes and shoe shops achieved growth of 2%.