Bank expected to cut interest rates despite conflicting data

The outcome of today's meeting of the Monetary Policy Committee hangs in the balance after figures yesterday showed a surge in retail sales, a stagnating housing market and a fall in services growth during September.

The conflicting data adds to an already confused picture of how the economy has been hurt by the 11 September attacks.

Most economists expect the Bank of England to follow its surprise quarter-point cut two weeks ago with a similar reduction at noon today. This would take rates to 4.5 per cent – the lowest level since 1963.

"The data since 11 September have been volatile and sent mixed signals," Ross Walker, UK economist at Royal Bank of Scotland, said. "But we are looking for a quarter-point cut."

The key piece of news yesterday was an unexpectedly sharp contraction in the services sector last month, according to the closely watched survey from the Chartered Institute of Purchasing and Supply.

Its index slumped to 48.1 from 50.9 on a scale where any number below 50 indicates contractions. It was the first decline since February 1999.

"A significant proportion of firms reported that activity levels had been adversely affected by the events of 11 September," CIPS said.

It singled out transport, hotels and restaurants as the sectors where the immediate cancellations following the attacks were most keenly felt.

While new orders fell at an even faster rate than in August, CIPS pointed out that many companies said customers were "postponing orders", implying that there might be a rebound this month.

The gloom was compounded by the Halifax bank, which said the housing market stalled in September. The cost of the average home failed to rise while the annual rate of inflation slowed to 8.3 from 10.9 per cent. The price of existing – as opposed to newly built homes – actually fell 3 per cent.

Halifax said it was too early to assess the effect of the attacks, but warned they could depress a slowing market. "It could have put some people off home-buying," its chief economist, Martin Ellis, said.

Separately, the Royal Institution of Chartered Surveyors rushed out an early version of its report showing a sharp fall in the number of estate agents reporting rising prices in the wake of 11 September. "The terrorist attack undoubtedly had an effect," RICS's chief economist, Milan Khatri, said. "But the greatest influence is the deteriorating economic outlook."

However, the impact was offset by a separate survey showing shoppers flocked back to the high street after the terrorist attacks, pushing retail sales growth to a five-year high.

The Confederation of British Industry said that almost two-thirds of retailers reported rising sales compared with 8 per cent suffering falls. The survey of 266 companies was carried out between 5 and 25 September with 70 per cent replying after the terrorist attacks.

Alastair Eperon, a director of Boots and the head of the CBI's survey panel, said: "The attacks may have dented UK consumers' confidence but so far there is little evidence of any effect on their spending."

Although most economists believe the Bank will cut rates by a quarter-point, there was a wide range of views. Jeremy Hawkins, at Bank of America, said: "The UK service sector is weak enough to prompt fresh speculation about the Bank cutting by 50 basis points."

But Philip Shaw, chief UK economist at Investec, said the outcome of the economic data since 11 September had been a "score draw". "We don't see that the MPC feels an urgent need to cut. They will sit back until November when they have the benefit of a new Bank inflation forecast," he said.