Homeowners breathed a collective sigh of relief yesterday as unexpected falls of retail sales in March all but guaranteed that the Monetary Policy Committee (MPC) would not increase interest rates as expected.

The Office for National Statistics (ONS) said that sales contracted a seasonally-adjusted 0.1% in March from February, dragging the annual rate of increase down to 2.7%, the worst since August 2003.

Household good stores were hit hardest with a fall of 0.6% as the property market continued to slow. The non-store sector, which includes internet retailers, plunged 3.9%, but department stores' sales rose 1.2% despite recently falling sales reports from Marks & Spencer, JJB Sports and French Connection.

Economists had said a big rise in sales, following strong inflation data earlier in the week, would have all but guaranteed that the Bank of England would raise interest rates to 5% in May after the election.

As the actual number of sales was considerably lower than expected, analysts had moved quickly to assume that rates were not going to increase. Standard Chartered's Gavin Redknapp said: "The Bank has been putting markets on watch for a rate rise, with the uncertainty over the consumer outlook the only thing apparently restraining the MPC from hiking. With the slowdown now entrenching, it looks like all bets are off for a rate rise before the summer."

During their April meeting, the MPC remained concerned at growing signs that consumer spending, which accounts for two-thirds of the economy, had slowed down. Peter Dixon, economist at Commerzbank Securities, commented: "The retail sales data said there is no room for the Bank of England to raise interest rates, despite the fact that inflation is at a seven-year high."

Paul Clarke, a director at Barclays business banking, said: "The traditional Easter bounce has failed to materialise and retailers remain very cautious about the sector's outlook. Current trading conditions are difficult as footfall continues to be subdued and consumer behaviour has been tempered by a static housing market."

Some economists said that it was possible that the numbers were distorted by the fact that Easter fell in March this year and not April, but the ONS said it was confident that its seasonal adjustment had taken care of that.

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