Governor likely to hold back from rate cut

The governor of the Bank of England dropped a broad hint last night that interest rates would be left on hold for some time as he highlighted the problems in interpreting economic data over Christmas.

On the eve of today's figures for retail sales in December, Mervyn King told a business audience in Manchester that it was "foolish to put much weight on any one month's figure, especially at Christmas."

The governor said that on past experience the data from the Office for National Statistics would be subject to considerable revision and, in any case, only gave a partial picture of consumer spending.

"For those reasons we should recognise that the true meaning of Christmas will not be revealed until Easter - or possibly much later".

The Bank's nine-strong monetary policy committee, Mr King said at a CBI dinner, was "more concerned to discern the meaning of the path of consumer spending over a longer time horizon."

Following conflicting statements from leading retailers, today's official data has been eagerly anticipated in the City, where analysts have expressed the belief that business in the shops during December will provide a pointer to whether interest rates have peaked at 4.75%.

The British Chambers of Commerce called on the Bank yesterday to be alert to the possible need for cheaper borrowing costs if the "major risks" to the economy identified in its quarterly report materialised.

David Frost, the BCC's director-general, said: "While consumer spending is set to decelerate significantly over the next 12 to 18 months, it is unlikely that investment and exports will rise sufficiently strongly to pick up the slack. If manufacturing prospects worsen, or if house prices start falling more sharply, early interest rate cuts should be actively considered."

The BCC said its balance of home sales had weakened in the fourth quarter of 2004, investment was down and the prospects for employment were less rosy in both the manufacturing and service sectors. Exports provided more encouraging news, with the outlook at its best for eight years.

Mr King highlighted the risk that consumer spending could slacken from its recent rapid rate. Growth in consumption had averaged 4% between 1997 and 2001, and not fallen below 2% since 1995. "We are not so much a nation of shopkeepers as a nation that keeps shopping," the governor said.

Over the past three years, consumer spending growth had returned to a more sustainable rate and there were concerns among commentators that there could be a further slowing if households decided to save more. Holding out the prospect that sustained evidence of slowing spending could prompt the Bank into a rate cut, Mr King said: "Such concerns about the short run are indeed analysed carefully each month by the MPC, and the results of that analysis feed into our monthly interest rate decisions.'

In the longer term, Mr King said, the question was not whether Britons were saving too much but too little. Governments should set the right example by not borrowing too much and he warned Gordon Brown against relaxing his tough fiscal discipline. "It will clearly be important that the prudent approach to fiscal policy that has served the UK so well in recent years is continued - over the next [economic] cycle and beyond."