Markets take gloomy view of messages from the top: Fears over interest rates - Retail sales flat in May

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The Independent Online
FINANCIAL markets weakened yesterday on renewed fears of rising interest rates following the Governor of the Bank of England's Mansion House speech.

The FT-SE 100 index fell 15.7 points to close at 3,030.1, and gilt- edged stocks dropped by two- thirds of a point. The Governor, Eddie George, warned in Wednesday night's speech that an eventual rise in rates was inevitable as the economy strengthened.

The fall in gilts also reflected a weaker tone in world bond markets, where there is lingering concern over inflation. The gloomy reaction to the Mansion House speeches of both Mr George and Kenneth Clarke, the Chancellor, was influenced as much by concern about inflation as about interest rates. There are fears that the Treasury and the Bank might allow inflation pressures to develop before raising rates.

Brian Maloney, of Morgan Stanley, said: 'People are more inclined to reward pre-emptive action than a delay, and we are still haunted by past experiences of waiting too long.'

Official figures yesterday gave mixed signals on the pace of the recovery. The volume of retail sales was unchanged in May but in the latest three months - a better guide to the trend - sales were 0.9 per cent higher, little changed from the three-month growth rates experienced earlier in the year.

In the year to May sales volumes were 3.9 per cent higher. Analysts said it was too soon to conclude that sales were being restrained by the tax increases.

The Retail Consortium warned that future sales could be hurt by the weakening housing market. Last month, sales of furniture and carpets and do-it-yourself goods showed signs of flagging.

Britain's car production in May was marginally down on a year ago to 128,538 units, but production for export jumped by 22 per cent to 53,564. The Society of Motor Manufacturers and Traders said that the European market was now showing sustained recovery.

The public sector borrowing requirement shrank to pounds 4.3bn last month from pounds 4.8bn in May 1993. In the first two months of fiscal 1994 the PSBR stood at pounds 8.5bn against pounds 9.4bn a year earlier.