Spending boom halts rate cuts

As new figures from Britain's retailers show consumer spending holding up, the Monetary Policy Committee is expected to leave interest rates unchanged when it meets on Wednesday. The market believes the Bank of England has reached the end of its cycle of seven rate cuts.

The BoE and the European Central Bank, which meets on Thursday, are both expected to take a 'wait and see' approach after making pre-emptive cuts of 50 basis points last month.

The MPC will take into account the slight fiscal expansion announced in last week's Pre-Budget Report. Chancellor Gordon Brown's upbeat assessment of growth prospects will also contribute to unchanged rates.

'Fiscal policy is definitely looser than it was. This takes some pressure off the MPC to cut rates,' says Stephen King, managing director of economics at HSBC.

Recent comments by MPC members suggest the balance of risks between inflation and a downturn is broadly equal.

The MPC will make its decision on Wednesday, a day earlier than normal to allow Governor Sir Edward George to attend a General Council meeting of the European Central Bank in Frankfurt on Thursday.

City economists believe that the ECB wants a period of stability while 14 billion euro notes and coins are launched to the European public on 1 January.

The Frankfurt-based bank is expected to cut again in the new year in response to virtually stagnant growth and weakening inflationary pressures.

Meanwhile, new figures are set to show the British consumer still holding up as the three largest economies in the world slip into recession. The British Retail Consortium is tomorrow expected to announce that spending in the shops grew by 5.8 per cent in November against the same month a year ago. This is down slightly on October's 6 per cent growth rate but provides no evidence of a downturn in consumer sentiment.

The exception to this is central London, where the fall in tourist visitors from abroad and the regions is having a significant impact on trade. Harvey Nichols, Selfridges and John Lewis have all reported stronger sales outside the capital.