Hope of rate cut dented by surging retail sales and property market

The hawks on the Monetary Policy Committee were handed fresh ammunition to kill off calls for a cut in interest rates today as retail sales hit a five-year high and house prices rose sharply.

City economists were unanimous yesterday that the monetary policy committee would keep rates on hold when it ends its two-day meeting at noon.

However, analysts are nervous after last month's surprise rate cut. This unease was compounded by a separate survey yesterday that showed demand in the services sector fell for the first time in over two years.

Halifax, the bank, said the price of the average home had surged 1.5 per cent in August. Homes are now 11 per cent more expensive than a year ago.

The bank said the latest jump in prices took the value of an average property to £94,101 compared with £85,768 in January – a windfall of £8,333 in just eight months.

This means homeowners have made a paper profit of £1,000 in every month since the global slowdown began in the New Year.

Martin Ellis, chief economist at Halifax, said: "The buoyancy of the housing and mortgage markets indicates that the marked slowdown in the world economy and recession in manufacturing have so far had little effect on consumer sentiment."

The data came a day after Nationwide building society raised its forecast for house price inflation this year to 11 per cent from 7 per cent.

Further evidence of the strength of the consumer economy came from a survey showing retail sales growing at their fastest rate since October 1996.

The CBI, the employers' group, said sales volumes were "significantly" above average for the time of year with a balance of 49 per cent of retailers reporting higher sales last month, up from 44 per cent in July.

Economists in the City said yesterday's figures, combined with the unexpected rebound in the NAPM survey of US manufacturing on Tuesday, meant the MPC was unlikely to cut rates.

Data over the last month have shown mortgage borrowing at record levels and the labour market continuing to tighten, with unemployment falling and wage levels rising.

"Together with recent robust earnings, consumer credit and house price numbers, today's CBI retail sales data warrant caution on the part of the MPC, adding to the case for rates to remain on hold," said Ross Walker, UK economist at Royal Bank of Scotland.

The CBI, the British Chambers of Commerce, the Engineering Employers' Federation have called for a rate cut to prevent a manufacturing recession spreading wider.

Their argument was yesterday bolstered by a survey of services sector business managers that showed almost no rise in activity last month.

The Chartered Institute for Purchasing and Supply said its index rose to 50.9 from 50.3 on a scale where a number below 50 indicates contraction.

But the rise in the headline number concealed a fall in new business, its first since February 1999. "Companies across all sectors reported that clients were increasingly deferring contracts in the current uncertain environment," CIPS said.

Demand for staff was subdued, which could mean services employment has failed to offset the mounting toll of job cuts in the manufacturing sector.

George Buckley, UK economist at Deutsche Bank, said that although rates would remain unchanged today, service sector weakness meant it was too early to say there would be no more cuts.

The case for a cut was boosted by the fact both Halifax and the CBI said they expected demand for goods and houses to weaken in the coming months.