The Chancellor is thought to be reluctant to cut rates early, holding fire until it is clear how consumers react to the tax increases in April. A later rate cut would also have more chance of influencing the local and European elections in late spring.
But some of the Chancellor's advisers argue that it will be too late to leave a rate cut until it is obvious that the tax increases have hampered economic growth. They believe he should move early. This would also have greater benefit for many mortgage-holders whose rates are reviewed annually.
The City is looking for an early rate cut to help justify the recent surge in share prices and to prolong the bull market into the new year. The FT-SE 100 index ended 1993 at 3,418.4, 44 points below its record close on profit taking but still 20 per cent higher than it was 12 months earlier.
The futures market is anticipating a half-point cut in base rates from their current 5.5 per cent.
The Chancellor will meet the Governor of the Bank of England in 10 days to discuss a possible rate cut, after he returns from an extended trip to the Far East. The precise timing of the cut would be left to the Bank to decide.
There is little sign yet of a weakening in recovery to justify a rate cut. Retailers report that December trading has been well up on last year's levels, despite a slide in consumer confidence following the November Budget. Survey evidence suggests that the recovery in manufacturing industry remains intact, while the fall in unemployment appears, if anything, to be accelerating.
The December spending boomlet has continued since Christmas, with many retailers reporting the strongest start to their winter sales for years.
James May, director-general of the Retail Consortium, estimated that sales volumes for the Christmas period were up by 5-6 per cent on 1992. That compares with increases throughout 1993 running at 2, 3 and 4 per cent. 'There's been a particularly powerful surge in the South-east, boosted by strong tourist spending.'
John Lewis said sales in its department stores were up by 9 per cent on last year on the first day of its annual clearance sale. Linen, china, glass and electrical goods were all selling well. In the week to 18 December - the latest for which full details are available - the stores sold a record pounds 47m, up by 10.6 per cent.
Selfridges, part of the Sears group, also reported unprecedented crowds in the first two days of its sale: 'It was impossible to move in the store,' said a spokeswoman. 'The china and glass department was chaos.'
Menswear shoppers were in evidence after four years' hibernation. 'We were selling one thousand suits an hour in the first three hours of the sale,' she said.
The Liberty chain supported the view that men were finally replacing their threadbare clothes. Tony Salem, managing director of Liberty's retail division and president of the Regent Street Association, said: 'This is the best Christmas we've had for four years.' He estimated that one-fifth of sales were to foreign visitors. As long as unemployment keeps coming down, that's what will bring about the confidence to go out and shop. That's going to be more important than another half-point off interest rates.'
Goldsmiths Group, the second biggest jewellery chain after Signet (formerly Ratners) delighted investors by reporting that sales in the month to Christmas Eve were up by 13 per cent.
J Sainsbury declined to comment on Christmas trading. Analysts expect it to launch its annual winter promotion within the next few days. In previous years the promotion has sent a shudder through supermarket shares.
Christopher Huhne, page 6Reuse content