Retail sales slowdown dents confidence

The dilemma facing the Bank of England was exposed by figures yesterday showing that retail sales slumped to a two-year low last month while services businesses rebounded.

The Bank's Monetary Policy Committee is widely expected to leave interest rates on hold today for the tenth month in a row in the face of a hazy picture for the outlook of the UK economy.

Yesterday's figures added to the confusion with the Confederation of British Industry reporting another weak month on the high street but business managers saying services sector growth had accelerated.

The CBI said its monthly poll of 250 retailers showed a slim balance of 5 per cent reporting growth in sales, the weakest figure since October 2000.

Official figures since May have shown two successive falls in retail sales and one month of weak growth, fuelling fears that the spending boom had run out of steam.

The CBI said its survey showed that a slowdown in consumer spending had "set in" and blamed slower growth in household incomes and falling consumer confidence.

Retailers have also abandoned their optimism about the coming months, with a balance of 10 per cent – another two-year low – expecting a rise in sales volumes

Ian McCafferty, the CBI's chief economist, said: "The Bank of England should stand ready to cut rates if this stream of gloomy economic news continues."

GDP growth was revised down thanks to an astonishing 5.3 per cent slump in manufacturing output in June. The MPC will know the figure for July, published on Friday, before it sets rates today.

Evidence that the UK economy was still on track for recovery came from a poll of 620 services companies, which found that both output and new orders enjoyed faster growth in August.

Companies also managed to raise their prices again, the Chartered Institute of Purchasing and Supply said. Its overall index rose to 55.1, a three-month high, where more than 50 indicates growth.