Call for rate cut as output prices fall to 38-year low

Click to follow
The Independent Online
THE CITY yesterday warned the Bank of England to stand ready to cut UK interest rates again after producer price inflation hit a 38-year low and figures painted a dismal picture of activity in the high street.

Retail sales fell in October for only the second time since March 1995, according to the British Retail Consortium (BRC). Official data from the Office for National Statistics confirmed that prices continue to fall in manufacturing.

Neil Parker at Royal Bank of Scotland said: "The deflationary forces are building in the economy and will require further rate cuts at some point". David Coleman at CIBC Markets said: "Once again the latest reading on inflation at the factory gate level suggests there is little of it. All this bodes well for another easing of monetary policy."

October's BRC sales monitor revealed that like-for-like sales were 0.6 per cent lower than in the month last year. Mid-season price promotions continued through the month, the BRC said, and poor weather kept shoppers at home.

Ann Robinson, BRC director general, warned: "There is a paramount need to keep consumer confidence from collapsing if recession is to be avoided. We hope the MPC [the Monetary Policy Committee] will stand ready to make further cuts if confidence doesn't bounce back".

The ONS said producer output prices fell by 0.2 per cent in October, more than the City expected. This takes the year-on-year rise in output prices to just 0.1 per cent, the lowest since March 1960. Producer input prices also fell by 0.2 per cent.

Despite the weak economic data, Chancellor Gordon Brown defended his view that the economy was on course for a soft landing next year.

Giving evidence to MPs on the Treasury Select Committee, Mr Brown said his forecasts for the UK economy - of growth slowing to 1 to 1.5 per cent next year before rebounding in 2000 - were based on the best information available and in line with other leading forecasters.

The Chancellor is understood to have factored significant interest-rate cuts into his forecasts. Last week's bold move by the Bank of England - which cut rates by half a point - will help achieve his targets.

Mr Brown said yesterday that one reason why his growth forecasts were reasonable was that "monetary policy is more forward looking and able to react to what is happening all over the world". He said a rebound in world trade and continued growth in the European Union would help the UK reach his targets for growth in 2001 of between 2.75 per cent and 3.25 per cent of gross domestic product (GDP).

The Chancellor staunchly defended his projections for borrowing, and repeated that his "golden rule" - only borrow for investment - would not be broken over the course of the economic cycle.

His comments came as Sir Clive Thompson, president of the Confederation of British Industry (CBI), warned that the Government needed to "grasp the nettle" on public spending.

Speaking at the CBI southern regional dinner at Ascot, Sir Clive said: "We need to face up to some uncomfortable questions about priorities and affordability."

Comments