The Week Ahead: Bank to hold rates, but not for long as inflation speeds up

With the financial health of the consumer coming under greater scrutiny, eyes will turn to the Bank of England this week as it makes its monthly announcement on interest rates.

Economists seem certain the Monetary Policy Committee (MPC) will keep rates at 5 per cent, but many expect the European Central Bank (ECB) to raise rates in the eurozone at its own meeting this week.

Mike Lenhoff, chief strategist at stockbroker Brewin Dolphin, predicts the Bank of England will leave rates unchanged this week, but believes that the cost of borrowing could rise by April. He notes that inflation is not only continuing to rise above the Bank's target of 2 per cent, but it is also accelerating. He adds that the housing market remains strong, which could add further pressure on MPC members to raise rates to prevent the economy from overheating.

Tony Dolphin, director of economics and strategy at Henderson Global Investors, believes that a rate rise on the Continent should be expected. He said: "Eurozone interest rates are now up to 3.5 per cent and markets are expecting one or two more hikes in the early part of 2007. We are not sure where the ECB thinks the neutral rate is, but it could well be around 4 per cent."

With the Christmas season not that far behind us, a number of UK retailers have been citing increased online competition ahead of any official reports to the market - as a reason for potentially disappointing numbers.

Expectations are low for HMV, which provides its results on 11 January. The CD and DVD retailer advised the market before Christmas that festive business would disappoint, and some analysts believe sales in its stores could have deteriorated even further since its last statement.

Also reporting on the state of the high street this week will be Wm Morrison and J Sainsbury.

Barclays' analysts rate Morrisons as a "buy" and Sainsbury's a "sell", despite noting that both groups are expected to report a solid Christmas season.

Bramdean Equity Managers' UK fund manager, Rachel Durkin, said that Sainsbury's shares are expensive and could be hit by the smallest disappointment in its trading update. Both Sainsbury's and Morrisons have an uphill struggle over their valuations and it will not take much to hurt them, she noted.

Marks & Spencer is expected to say on Tuesday that Christmas trading on a like-for-like basis has risen by close to 6 per cent - in line with expectations. Analysts believe that food sales will not repeat the strong growth seen in the previous Christmas trading period, but will still show a slight rise. Barclays forecasts a like-for-like sales rise of just under 9 per cent for the group's general merchandise section, and an increase of around 3 per cent in its food division. Improvements such as these, Barclays believes, could keep the retailer's share price momentum on track. M&S shares finished last week at 734p.

JJB Sports, the sports clothing retailer, will make its festive trading statement on Wednesday, while Alliance Boots, the high-street chemist, will update the market on Thursday. Analysts are concerned that the company's management has focused on the merger of Alliance with Boots, completed earlier this year, rather than on Christmas trading.

Oil hit its lowest price for nearly two years, as it fell below $55 a barrel. But Barclays analysts are still rating BP, which makes a trading statement on Tuesday, as a buy. Investors are bullish about the sector's prospects despite the falls in the global oil price, and the expectations are that BP will indicate healthy fourth-quarter production figures.

Artemis, the holding company belonging to François Pinault, the French billionaire, has until tomorrow to decide whether to bid for Suez, the Franco-Belgian utility. Other potential bidders include Albert Frère, the Belgian billionaire and largest existing shareholder in Suez.

In the healthcare sector, which has enjoyed good 2007 trading so far, AIM-listed biotech company Cobra Bio-Manufacturing is due to announce its results on Tuesday. The small-cap company has been faring well recently after signing a co-operative research and development agreement in the fourth quarter of 2006 with the US Navy.

CALENDAR

Tomorrow 8

No results scheduled

Tuesday 9

UK RESULTS: (Final) Cobra Bio-Manufacturing; (Interim) Halladale Group, Interlink Foods, MediaSurface, Northgate, EBTM

TRADING STATEMENTS: BP, Marks & Spencer

Wednesday 10

TRADING STATEMENT: Experian

Thursday 11

UK RESULTS: (I) HMV

TRADING STATEMENT: Alliance Boots, J Sainsbury

Friday 12

No results scheduled