Rate cut hopes dashed by consumer spree

Industry hopes of a further cut in interest rates today are likely to be dashed after new figures showed shoppers went on a summer spending spree last month.

But the two-speed nature of the economy was highlighted by a survey showing manufacturers still being buffeted by the global economic downturn. According to the Chartered Institute of Purchasing and Supply, output fell in July for the fifth month.

"The evidence of further job-shedding underlines the point that the industrial slowdown could soon become an economy-wide problem," said Jonathan Loynes, chief economist at Capital Economics.

While industry is struggling, retail sales are at their highest since last May, according to a separate survey from the Confederation of British Industry.

The imbalances in the economy pose a growing challenge for the Bank of England's monetary policy committee, which began its two-day monthly meeting as the figures were published. Threadneedle Street is worried another cut in rates could spark a further surge in retail sales and reawaken inflationary pressure within the economy.

The CBI said 57% of retailers reported higher sales than a year ago in July against only 13% reporting lower sales, producing a balance of plus-44 up sharply from plus-30 the month before.

"Today's survey is further evidence of the two-speed economy, with retail sales remaining strong, while manufacturing output continues to decline," said Sudhir Junankar, the CBI's associate director of economic analysis.

Despite evidence of soaring growth in the retailing sector, the CBI renewed its calls for the Bank of England to cut rates again.

"Because of the impact the global slowdown is having on manufacturing and other exposed businesses, the CBI stands by its judgment that a quarter-point cut in interest rates would be a prudent move," said Mr Junankar.

But few analysts expect the MPC to change rates from their present level of 5.25% when it announces its decision at noon today.

"The data continue to argue for the retention of the current compromise monetary stance of steady rates," said Jeremy Hawkins, chief UK economist at Bank of America in London.

Ross Walker, from the Royal Bank of Scotland, said: "While consumer activity remains this robust, the CBI can forget about rate cuts."

• Manufacturing activity in the United States also fell in July, the 12th consecutive month in which companies there have cut output.

The National Association of Purchasing Management said yesterday that its purchasing index fell in July to 43.6 from 44.7% in June. Readings below the level of 50 indicate that the sector is shrinking.