* FTSE 100 falls 0.6 pct, hit by drops in Astra and Glaxo
* Astra and Glaxo fall after Morgan Stanley downgrade
* Strong UK retail sales fail to lift FTSE
* Economy recovery could see rates rise sooner-than-expected
By Sudip Kar-Gupta
LONDON, Aug 15 (Reuters) - Britain’s benchmark equity index fell on Thursday, weighed down by falls in heavyweight healthcare stocks, while strong UK retail sales data reignited the prospect of an earlier-than-expected interest rate rise.
The blue-chip FTSE 100 index was down by 0.6 percent, or 37.37 points, at 6,550.06 points in mid-session trade.
Healthcare stocks AstraZeneca and GlaxoSmithKline fell 2.3 and 1.1 percent respectively to take the most points off the FTSE 100, which traders attributed to a downgrade on the stocks from Morgan Stanley.
A greater-than-expected jump in UK retail sales also failed to lift the FTSE and actually pushed it lower, a reaction investors attributed to the fact that growing signs of a recovery in the British economy may herald a sooner-than-expected rise in interest rates.
Bank of England governor Mark Carney has said interest rates will not rise before UK unemployment drops to 7 percent.
However, Brown Shipley fund manager John Smith said the strong retail sales showed unemployment could fall to that level earlier than forecast, which in turn could lead to a quicker rise in interest rates.
Higher rates could in turn draw back investors to bonds, away from equities, as returns on bonds would also increase.
“The better the economic news, the more likely it is that interest rates will (rise) earlier than forecast. We could reach that 7 percent unemployment target well before Carney had forecast,” said Smith.
UK retail sales level link.reuters.com/baf48s
G7 economic growth since Q1 2008 (pre-crisis-high):
The FTSE 100, which has risen around 11 percent since the start of 2013, has failed to hold above the 6,600 point level over the last month and has slipped back from a 13-year high of 6,875.62 points reached in May.
This has been because many investors have sold out for a profit on that rally due to expectations that the U.S. Federal Reserve may start to scale back economic stimulus measures that had driven much of this year’s equity rally in September.
APS Alpha technical strategist Adrian Slack said that while he saw the FTSE stuck in a sideways trading range over the coming month, he remained more confident on a longer-term basis.
“We are stuck for now in a tight trading range, but I can’t see why we shouldn’t be able to test the year highs again by the end of the year,” he said. (Additional reporting by David Brett; Editing by Toby Chopra)