Slower spending adds to pressure for rate cut

DIANE COYLE

Economics Correspondent

There was no sign that Kenneth Clarke, Chancellor of the Exchequer, and Eddie George, Governor of the Bank of England, decided to reduce base rates at their monthly monetary meeting yesterday. But new evidence of a fall in high street spending last month put more steam behind the City bandwagon expecting lower interest rates by Christmas.

A cut yesterday - or in the next few days - would have come as a surprise, especially after Mr Clarke had declared himself "reasonably optimistic" about the economy in a morning radio interview. "I don't believe we're on the verge of another recession," he said.

Mr Clarke said he aimed to reduce taxes, but added: "Ours are going to be sensible tax cuts, if and when we can afford them." Tax cuts would require cuts in public spending, he said.

The Treasury's monthly assessment of the economy yesterday said growth had slowed to a more sustainable rate. The monthly indicators showed a modest slowdown, its report said, and survey evidence pointed to further healthy expansion in manufacturing.

Less optimistic City economists took yesterday's surprise fall in retail sales, reported in the Confederation of British Industry's distributive trades survey, as further evidence of an alarming economic slowdown. The link between the survey and official retail sales figures is not strong, but next Thursday's official statistics are expected to record a decline, too.

After four months of modest sales growth, August brought a slight fall, the CBI said. Higher sales were reported by 34 per cent of retailers, lower sales by 41 per cent.

Chemists, confectioners and off-licences enjoyed higher sales. Motor traders reported the first rise in year-on-year sales since last August. The sharpest declines came in areas such as specialist food shops and DIY retailing.

This pattern suggested it had been too hot to shop for anything apart from cold drinks and suntan lotion in August, according to Alastair Eperon of the CBI. Ian Shepherdson, an economist at HSBC Markets, said: "I don't think the Chancellor should cut interest rates because of the hot weather."

The CBI said that although sales were still up, strong competitive pressures would continue to limit retailers' ability to increase prices. Sales volumes were below average for the time of year last month but retailers expect a moderate rise this month. The CBI's chief economic adviser, Kate Barker, said interest rates should be left on hold for the time being.

However, pressure for a cut is likely to build if economic statistics continue to be weak.

Next week brings figures for unemployment, producer and retail prices and retail sales.