City gears up for rate cut

Falling consumer confidence, weaker growth and a stagnant housing market pushed the pound to its lowest levels for nine months last night as the City geared up for a cut in interest rates from the Bank of England to boost the economy.

Although it later recovered to close at just below $1.80, the pound fell sharply on the foreign exchanges to $1.7904 yesterday - its lowest level since October - after the Office for National Statistics shaved its estimate of growth in the first quarter of 2005 to 0.4%, its slowest rate in two years.

Separate data from the Nationwide building society showed house price inflation tumbling from 5.5% to 4.1%, a level not seen since the mid-1990s, prompting knock-on effects on consumer confidence. The monthly consumer health check from consultancy Gfk dropped to its lowest level this year in June. According to the ONS breakdown of the first-quarter growth figures, household consumption grew by just 0.1% in the three months to March, the slowest rate for four years, and recent figures suggest the trend has continued into the second quarter.

The Bank of England's monetary policy committee will be meeting next week to discuss the next possible move in interest rates. Economists had thought that a quarter-point cut to 4.5% was likely in August, but some now think it may come next week.

Close attention will be focused on today's report on manufacturing from the Chartered Institute for Purchasing and Supply, following the news from the CBI earlier in the week that retailers were having their toughest time for at least 22 years. The Bank will also have sight of the CIPS service sector report, which comes out early next week, before its rate-decision meeting on Wednesday and Thursday.

Alan Castle, a UK economist at Lehman Brothers, said: "We have increased the probability of a move as early as the July meeting from 25% to 40%." At the June meeting, the MPC voted 7-2 in favour of keeping rates unchanged.

The ONS said growth in the first quarter had been reduced from 0.5% and that the annual rate of growth had been cut from 2.7% to 2.1%. Gordon Brown forecast in the budget that the economy would grow by 3% to 3.25% this year, but the City said yesterday that the Treasury would now have to scale back its predictions.

Growth in previous years has been revised upwards, however, by a total of 0.6 percentage points.

Analysts said that this meant there was less spare capacity in the economy last year than had previously been thought, and that this might be a factor at next week's MPC meeting.

Most, however, argued that the Bank would be more concerned about the recent evidence of economic slowdown than past revisions to the data.

Jonathan Loynes, the chief UK economist at Capital Economics, said: "Major revisions unveiled in the [first quarter] national accounts have left the economy slowing much more abruptly than previously thought, and hence added further support to our forecast that interest rates are set to fall sharply over the next year."

Research group Hometrack said Nationwide's estimate of house prices growing by less than 5% overstated the case. Its survey showed that prices have now fallen by 3.6% on an annual basis.

Hometrack housing economist John Wriglesworth said: "Housing surveys documenting an increase in annual growth are misleading policy decision-makers and the Bank of England."