Katie Allen

Reuters

LONDON — British retail sales fell at their fastest pace since 1992 last month, and factory activity shrank for the first time in two years, surveys showed yesterday, cementing expectations interest rates will stay on hold next week.

Analysts had already scaled back predictions of further Bank of England rate hikes in recent weeks after policy makers’ fear of a consumer downturn seemed to be confirmed. The latest reports only boosted that view.

The Confederation of British Industry’s (CBI’s) April survey showed yesterday retail sales fell at their sharpest pace since July 1992 when Britain was emerging from recession, a tenth of the population was unemployed and interest rates were at 10%.

A sales balance of -14 contrasted with market and retailers’ own expectations of a modest rise. For May, retailers were their least optimistic in six months.

The CBI put the sharp fall down to a slowing housing market and lower disposable incomes. Some economists blamed the annual drop on the fact that the Easter holiday was in April last year but in March this year.

"The change in the timing of Easter is likely to have caused an unfavourable comparison with April last year," said Vicky Redwood at Capital Economics.

"However, the tone of the survey was in line with the continued bearish reports and profits warnings coming from retailers themselves."

The Chartered Institute of Purchasing and Supply/NTC Research said yesterday its purchasing managers’ index fell to 49,5 last month — its lowest reading since June 2003 and below expectations of 51,5 — from 51,6 in March. Any reading above 50 indicates expansion and below shows contraction.

The ruling Labour Party has made the economy the core of its general election campaign, but the latest figures highlight the challenges ahead for the winner of tomorrow’s poll.

"Unexpectedly weak economic data have dealt a double blow to the hawks on the monetary policy committee.

"The risk that the central bank may raise rates again shortly looks ever more remote," said Bank of America economist Holger Schmieding.

At meetings in March and April two of the nine policy makers at the bank wanted to raise rates 25 basis points, but others voted to leave rates unchanged with signs of household spending waning and bleak reports from the shops.

The latest "double whammy" of a weak PMI manufacturing survey and a retail slump meant the two hawks were unlikely to find new converts at the latest meeting, said Schmieding.