Falling UK retail sales boost hopes of further cut in interest rates

 

FIGURES showing an unexpected 0.6 per cent decline in British retail sales last month have lifted hopes of further interest rate reductions in Britain and helped to halt the sell off on British bond and equity markets.

But the recovery in London gilts and equities, a 50 point plus opening rise on Wall Street and more stable bond prices failed to prevent continued weakness on the Irish market, with financial shares particularly badly hit by the poor sentiment.

The recent weakness on bond markets has led to sharp falls in financial shares on the Dublin market, with the rise in bond yields impacting on shares that are traditionally compared with bonds in terms of their relative yields.

Financial shares fell 1.7 per cent on the Dublin market yesterday and have fallen by around 4 per cent so far this week. Gilt prices in Dublin steadied after the heavy selling of earlier this week, with signs of some overseas buying in the morning session.

British gilts recovered up to half a point of the declines suffered in the sell off on Monday and Tuesday and the FTSE 100 index closed 11 points higher at 3725.6, reducing the decline to 50 points.

Market sentiment turned more positive after the beginnings of a rally on Wall Street and comment on prospects for lower US interest rates from the US Federal Reserve chief, Mr Alan Greenspan.

But another batch of weak British economic indicators contributed to the London market's bull case, built on the need for further reductions in interest rates in coming months to encourage consumer led demand.

The unexpected 0.6 per cent decline in retail sales last month detailed yesterday followed recent figures showing weakening factory output and orders, falling construction work and lower housing starts.

If the deteriorating economic trends are confirmed today by gloomy comment on industrial trends from the Confederation of British Industry, City analysts will be more convinced that interest rates will be reduced again shortly.

Chancellor Mr Kenneth Clarke chopped bank base rates by 0.25 per cent to 6 per cent last month, and most City houses are expecting another reduction to 5.75 per cent next month to be followed by a further cut to 5.50 per cent by the early summer.

Last month's 0.6 per cent decline in high street sales surprised City economists. Bullish comment on the January sales from London department stores had been taken to indicate an improvement, not a decline, in the month's retail sales.

All main categories of retail goods participated in last month's weakening.