Bank faces demands for interest rate cut

Bank of England policymakers were facing a chorus of demands for a cut in interest rates last night after a disappointing start to the year for retailers and manufacturers.

The Institute of Directors joined calls for rates to be cut after the CBI warned that wary shoppers put the brakes on their spending spree in January - and the Chartered Institute of Purchasing and Supply said the embattled manufacturing sector had contracted for the second month.

Consumer spending provided the main prop for the economy throughout 2002, and analysts warned yesterday that the recovery in growth expected by the Treasury will be jeopardised if shoppers give in before industry revives.

"Manufacturing is continuing to struggle, and the momentum for the economy being provided by the consumer is beginning to fade," said Simon Rubinsohn of City stockbroker Gerrard. "Moreover, with companies still reluctant to step up capital expenditure at this point, it is hard to see GDP growth not remaining below trend."

With the Bank of England's monetary policy committee meeting to set rates this week, the IoD said yesterday's news called for a quarter percent cut. "There is no doubt the economic clouds are gathering," said Ruth Lea, head of the IoD's policy unit. "A possible war with Iraq is draining confidence and the markets are very jittery and bearish."

The CBI said a balance of +7% of retailers reported that sales increased last month - better than December's -3% but well below the 37% average seen in the first five months of last year. The underlying three-monthly growth rate is now at its slowest for four years.

"The modest pick-up cannot hide the underlying slowdown in sales growth and the fact that many retailers slashed prices to lure customers into the shops," said the CBI survey chairman Alastair Eperon.

Manufacturers also had a disappointing new year, according to the monthly Purchasing Managers' Index, which slipped to 48.6. from 49.3 in December, the lowest for a year and below the break-even 50 mark, signalling that the sector is in contraction.

CIPS said manufacturers had been forced to cut production, run down stocks and and lay off staff to deal with depleted order books and increasingly tight margins.

Martin Essex of Capital Economics said the report represented a sector heading back into recession after climbing into the black during the third quarter of last year.

"As manufacturing output almost certainly contracted in the fourth quarter, this survey suggests that it is odds-on to record another technical recession - two consecutive quarters of contraction - in the first quarter of this year."

UK manufacturing suffered in comparison with America's, where it expanded in January at a faster pace than in December.