Rate cut expected as cricket love affair and terrorism fears prolong decline

The City was last night bracing itself for a pre-Christmas cut in interest rates to pep up flagging consumer demand after the latest official retail data showed sales stalling in August.

With spending depressed by a cocktail of a weak housing market, fears of terrorist attacks and the nation's new-found love affair with watching cricket on TV, activity in shops and stores was unchanged last month, the Office for National Statistics said.

Deep and long summer sales helped to lift spending on clothing and household goods, but food sales were down by more than 1% on the month. The one bright spot for retailing was again online spending, which rose 1.3% in August.

Over the three months to August - a better guide to the underlying trend - retail spending was up 0.8% on the previous quarter and by 1.2% on the June to August period of 2004. ONS officials stressed that the increase between the two latest quarters was flattered by the strong performance of the consumer in June and that the more recent months had seen poor sales.

The consumer has been the locomotive of the UK economy in recent years, but the marked cooling in spending since the summer of 2004 has led to serious doubts in the City about Gordon Brown's growth and borrowing forecasts for 2005. The chancellor is expecting the economy to expand by 3% to 3.5% this year and for borrowing to fall slightly from the £34bn required to balance the government's books in 2004-2005.

The ONS had previously estimated that activity in July - which was the month of the two terrorist attacks on London - had been down by 0.3%, but yesterday revised this to a 0.6% fall.

Analysts said the underlying picture for retailing remained depressed, with little or no evidence that the cut in interest rates from 4.75% to 4.5% by the Bank of England last month had helped to raise consumer confidence.

Lorenzo Codogno, a co-head of European economics at Bank of America, said: "We expect a further slowdown in sales through Christmas. Soft August sales tilt the balance in favour of the supporters of a prolonged slowdown in consumption within the MPC.

"We expect further Bank of England easing, with the repo rate at 3.75% by mid-2006. Today's outcome increases the probability that the next rate cut will be delivered as early as November, in line with our expectations."

Neil Blake, director of economics and forecasting at the consultancy Experian, said the Bank was now in something of a quandry, with the weakness of consumer spending pointing to a need for lower rates but the increase in inflation encouraging caution on the part of the MPC. He added that the "lacklustre trend in volumes growth that has been evident since July last year continues.

"On the basis of the survey evidence we expect only a modest improvement in the coming months and forecast that sales volumes for the year as a whole will finish up being 1.8% up on 2004 - well down on the 6% growth that was recorded in 2004."