Slow high street sales prompt rate cut speculation

A disappointing retail sales survey today raised expectations of an interest rate cut next week.

According to the CBI's monthly survey of the retail sector, sales growth eased in June in a further sign of weakening consumer demand.

Retailers had expected a bounce compared with a year ago, when sales were hit by the jubilee holidays, but a pick-up failed to materialise.

"The retail picture for June is particularly disappointing. Consumer spending should have been much higher when compared with June 2002, when high street spending suffered as a result of the jubilee bank holidays, late half term, and the World Cup." said Alastair Eperon, chairman of the CBI's distributive trades panel.

"With growth continuing to slow in July, there is nothing in this survey to stop the Bank of England cutting interest rates next week."

The CBI report showed that 39% of firms said sales were up last month while 29% said that they were down, giving a balance of +10, compared with +14 in May, and retailers' own expectations of +17.

Today's survey indicated that that consumer spending growth is finally slowing, bringing closer the end of the consumer boom, analysts said.

The figures increase the chances of a rate cut when the MPC meet on Thursday," said Andrij Halushka, economist with the Centre for Business and Economics Research. "There is a 60-65% chance of a rate cut."

The Bank of England's monetary policy committee meets next week for its monthly decision on interest rates. It will be the first meeting under the new governor, Mervyn King, who succeeded Sir Edward George this week.

Mr King is considered an inflation hawk, but analysts have picked up on his remarks in an interview with the Times that hint at a cut. In the interview, Mr King expressed concern that the recent bounce in the pound could have a negative impact on growth.

"Perhaps the most significant change in the past month has been the rise of the exchange rate - it has gone up 3% and that will make some difference to the outlook for growth," Mr King said.

The Bank has left rates steady at their 48-year low of 3.75% since February in the hope that a lower pound would boost exports and help growth. But with sterling picking up strength recently, that hope is fading.

In other signs of a slowdown, last week's gross domestic product figures showed the UK economy growing at its slowest rate - 0.1% - for more than a decade in the first three months of this year.

House price inflation also seems to be cooling. A Nationwide building society survey this week reported that house prices rose 0.9% last month, against an average monthly rise of 1.1% over the previous three months.

If the MPC does not cut next week, there are strong expectations that a reduction will come next month, when the Bank publishes its forecasts for inflation and growth.