FTSE 100 hit by rate fears and weak US data

The FTSE 100 fell heavily for the second day running yesterday as markets fretted about higher UK interest rates and weaker than expected US retail sales figures.

The FTSE 100 index of leading shares fell 79.8 points to 4771.9 while in the US the benchmark Dow Jones Industrial Average closed down 114.9 points at 9502.8.

UK markets were spooked by comments made by members of the Bank of England's Monetary Policy Committee who were appearing before a Treasury Select Committee.

Sir Edward George, the Governor of the Bank of England, described UK house price rises as "unsustainable" and said that the MPC would have "no option" but to raise rates unless consumer spending cooled down of its own accord.

Economists said the comments increased the chances of a rate rise in July after the MPC left borrowing levels on hold at 4 per cent last week.

Peter Dixon, an economist at Commerzbank, said: "You very much get the impression that the committee is preparing us for a rate hike in the near future." Mr Dixon said next week's retail sales figures would be the key. "They could be a lot weaker so it's not a done deal. It's 50:50 now as to whether we get a rise in July or August."

Markets were also hit again later in the day by weaker than expected US retail sales figures, which showed that sales slumped 0.9 per cent, three times the drop economists had expected.

It was the sharpest fall since November, caused by slower car sales and lower petrol prices. Producer prices fell 0.4 per cent in May, fuelling hopes that the Federal Reserve will not increase interest rates.

Separately, the European Central Bank raised its forecast for inflation this year and said it expects economic growth to accelerate, boosting the prospects for an increase in interest rates by September.

Inflation will probably average as much as 2.5 per cent this year, exceeding the bank's 2 per cent limit, the ECB said in its June report.

It said the pace of growth may double to as much as 3.1 per cent next year from as much as 1.5 per cent this year.

Meanwhile, finance ministers from the Group of Seven leading industrial nations are due to fly to Canada for the G7 summit at the weekend. The key subjects for discussion will be international aid, debt relief and education. Treasury officials yesterday indicated that the G7 was likely to take a tough line on help for the stricken Argentinian economy. "The fund is in discussion with them but not at the stage of negotiating a programme," a spokesman said.