Second Bank insider votes for rise in interest rates

Consumer spending slumped to a two-year low in the run-up to Christmas, according to official figures yesterday that analysts said would delay a fresh rise in interest rates.

Consumer spending slumped to a two-year low in the run-up to Christmas, according to official figures yesterday that analysts said would delay a fresh rise in interest rates.

The Office of National Statistics halved its estimate of household expenditure from 0.4 per cent to 0.2 per cent, the lowest since the winter of 2003.

But the possibility of another rate rise remained on the agenda after it emerged a second member of the Bank of England's Monetary Policy Committee had voted for an increase at this month's meeting. Andrew Large, one of the Bank of England's deputy governors, joined Paul Tucker in voting for a quarter-point rise in the base rate to 5.0 per cent two weeks ago. The 7-2 split on the committee was the widest for 17 months.

But figures from the Office for National Statistics showed growth in consumer spending had fallen sixfold since the 1.2 per cent recorded in the first quarter of 2004.

There was further evidence of a slowdown in spending from a rise in stocks held by retailers, indicating shops were left with shelves of unsold goods in the run-up to Christmas.

The ONS said the fall was "very widespread" and included drops in spending on drink and tobacco, health, communications, education, recreation and financial services.

The figures come after a series of profits warnings from retailers. Next, Kesa Electricals, Woolworths and Topps Tiles complained yesterday that consumers were losing the appetite for spending.

In its briefing the ONS said: "The levels of stocks held by retailers and wholesalers have been revised upwards." But it was not enough to force a cut in the estimate of overall GDP growth for the final three months of 2004 at 0.7 per cent, above the UK's long-run trend rate of growth.

The pound fell as City economists said the majority of the MPC would want to wait for a picture of consumer spending in the first months of this year. Those figures will not be published until the end of May, which some analysts said could push any interest rate rise into the summer. "The possibility that the period of 'wait and see' could extend beyond May has risen," Malcolm Barr, a UK economist at JP Morgan Chase, said.

The minutes of the MPC's, meeting on 9 and 10 March showed that seven members, including the Bank's Governor Mervyn King, were worried about a possible slump in spending. "The available evidence suggested continuing uncertainty about the momentum in consumption growth," they said. "If consumer confidence was fragile, a rise in rates could dent it further."

They went on to say there was little evidence of inflationary pressures from the labour market or the high street.

Ross Walker, a UK economist at Royal Bank of Scotland, said: "For the majority within the MPC who want evidence of firmer consumer demand, there isn't much for them to see."

There was separate ammunition for the "doves" on the MPC from a survey of manufacturers by the CBI showing a decline in orders and confidence. But the Bank left the door ajar to another rate rise as the minutes showed some of those voting for unchanged rates "continued to think a rate rise might be warranted in due course".

The markets will now focus on today's testimony by Mr King, Mr Tucker and fellow MPC members Marian Bell, Steve Nickell and Richard Lambert before the Commons Treasury Select Committee.

The debate in the City was in contrast to Wall Street, where a sharp rise in US inflation added to concern that the Federal Reserve was preparing the ground for a half-point rise.

The core consumer price index, which strips out volatile food and energy costs, rose 0.3 per cent, the biggest increase since September. It came a day after the Fed warned inflationary pressures were "picking up".