View from City Road: Rate cuts look like the best option

The sharp fall in consumer confidence is bound to make the Chancellor think twice before raising taxes on 30 November. Until now, consumer spending has been one of the strongest components of demand driving recovery. Retail sales volume rose by a real 3.8 per cent over the year to August, and the wider measure of consumer spending (which adds restaurant meals and other items to retail sales) rose by a real 1.9 per cent over the year to the second quarter.

By contrast, investment dropped back in the second quarter. Exports have been sagging because of depressed Continental markets, and no one quite believes that the fall in imports, if it has occurred at all, has been as large as the official figures suggest. Businesses have been running down their stocks at a sharp rate. In short, consumption of both the personal and the governmental kind is the only good news on the horizon.

But the Chancellor should not panic yet. In September, the EC index of consumer confidence (derived from the Gallup poll) was minus seven, rather better than the long-run average from 1979 to 1992 of minus 10. The latest figure is well shy of the average, but the series is notoriously volatile. After all, there was a slide to minus 13 and minus 12 in June and July, only to see a recovery.

Perhaps the moral is that the Chancellor should not rely on raising a lot of revenue from the consumer - whether through direct or indirect taxes - unless he is also prepared to move on monetary policy. With the CBI distributive trades survey also looking a little gloomier, that interest-rate cut looks more and more appropriate.