AN unexpected decline in retail sales last month prompted immediate City speculation of further reductions in British interest rates, following the quarter point cut to 5.75 per cent early this month.

In stark contrast to City forecasts of 0.4 per cent sales growth in May, figures from the Office of National Statistics reveal a 0.1 per cent fall, raising question marks over the strength of the revival in consumer spending.

The Treasury was quick to emphasise that May's setback followed sales growth in previous months and that the underlying trend remained positive. Also, weak sales of clothing and footwear may well have been affected by last month's cold weather. Even so, the disappointing May figures provide further support for those economists arguing for further reductions in interest rates.

Already, failure to achieve growth projections due to weakness in manufacturing output, reflecting lower exports, has undermined the ability of the Chancellor of the Exchequer, Mr Kenneth Clarke, to introduce a pre election tax cutting Budget in November.

Mr Clarke could well have room for further loosening of monetary policy during the summer, particularly if growth in retail sales remains subdued.

City opinion still considers interest rate reductions unlikely.

But there is a growing minority forecasting a series of quarter point cuts reducing bank base rates from their current level of 5.75 per cent to 5 per cent by the end of the year.