Rates on hold despite retail slump

High street retailers basking in the glow of a better-than-expected Christmas will come crashing back down to earth this week.

Figures published on Tuesday by the British Retail Consortium will show that like-for-like sales in January fell for the first time in three months.

The decline in sales, which exclude new floor space added by retailers, is thought to be about 0.6 per cent. It will fuel fears that 2006 will once again be a tough year on the high street.

Kevin Hawkins, director general of the BRC, said this weekend: 'When you look at prospects for the first half of 2006, it's not good.'

Hawkins added that, although like-for-like sales are down, the figures are skewed because retailers managed their stock this Christmas better than last year and consequently there was less discounting last month.

But evidence of tough retailing conditions will not be enough to persuade the Bank of England's Monetary Policy Committee to cut rates. The Committee meets on Wednesday and is expected to leave rates on hold at 4.5 per cent.

The move will disappoint retailers but manufacturers, currently struggling to make profits as energy and steel costs rise, appear more relaxed.

Steve Radley, chief economist at the Engineering Employers Federation, said: 'We think the case for a cut hasn't been made. The housing market seems to be getting stronger. An interest-rate cut is not a top priority. The key issues are pensions and rising costs.'

There are fears that rising costs in oil and steel in particular are making it almost impossible for companies to fund new investment, although energy rises have not fed through into retail prices.

Most commentators agree that the next rate movement will be down but are divided as to the timing. The majority believe the Bank will cut rates in May.

Last week, Monetary Policy Committee member Kate Barker warned that the economy may not grow as fast as the Bank forecast in November and suggested a rate cut was justified. 'You are starting from a position where to keep inflation on track in the longer term you do need to have growth picking up,' she said. 'There are question marks about whether the pace of growth [will] prove strong enough, and this is the question for the February forecast round.'

But there is strong evidence that Britons are borrowing beyond their means after last Friday's news, which revealed a record number of insolvencies and a surge in court orders for repossessions of homes at the end of 2005. The number of people in England and Wales unable to pay their debts rose 57.1 per cent in the last quarter of 2005 to 20,461.

· The BRC fears that the European Union will impose swingeing duties on plastic bags, bin liners and nappy sacks.

The EU is investigating the issue after complaints by France and Spain that their manufacturers were losing out to Chinese competition.

The BRC, along with leading retail executives, has written to EU Trade Commissioner Peter Mandelson urging him to intervene in what the BRC fears could cost the big four supermarkets alone £60 million per year.

The EU could impose a tax of as much as 20 per cent on imported plastic bags. Privately, the EU believes that since Britain is one of only a few countries in Europe not to tax plastic bags it should not complain about facing duty on them.

The case was triggered after French firm SP Metal lost a contract to supply Carrefour with plastic bags to a Birmingham-based firm which outsourced manufacturing to China.

The BRC does not believe the complaint received the required backing to have triggered an investigation. But Peter Mandelson's spokesman said: 'If the BRC has got evidence to back this up, they should bring it to our attention.'