Retail sales and inflation data suggest cut in rates

Consumer spending on the high street slowed again last month, while official figures this week are expected to show that inflation remained below 2 per cent in July, adding further weight to arguments that interest rates should be kept on hold or cut.

The British Retail Consortium (BRC) is expected to announce today that like-for-like shop sales growth was around 3.5 per cent in July, beneath the 4 per cent rise seen in June and the 7.5 per cent rise in March.

Meanwhile, economic data due out tomorrow should show inflation rose to 1.8 per cent in July, up from the record low of 1.5 per cent in June.

Separately, a survey by the Confederation of British Industry (CBI) has found that the UK's small and medium-sized manufacturers are still finding trading tough.

The latest crop of evidence will strengthen arguments for UK interest rates to be kept on hold and could put pressure on the Bank of England's Monetary Policy Committee to order a cut when it meets early next month.

In particular, economists reckon tomorrow's inflation data could tip the balance toward a cut in interest rates later on in the year, despite the expected small rise in inflation.

Some banks are already anticipating interest rates will fall, with Goldman Sachs predicting a half-point cut in the fourth quarter of the year to 3.5 per cent and Investec looking for a quarter-point cut in the last three months to 3.75 per cent.

While tomorrow's inflation report is expected to show a small rise to 1.8 per cent, it is still at the bottom of the Bank of England's target range. A level of 1.8 per cent would also leave July with the joint lowest level of inflation, excluding mortgages, other than June's 1.5 per cent.

Last week, the Bank cut its forecasts for economic growth and inflation, saying it remained ready to take whatever action was necessary to meet the inflation target.

The BRC and KPMG retail sales monitor, however, is also likely to add to pressure for a cut in rates. Many of the country's best-known high street chains, such as Debenhams, have recently warned of tougher trading conditions.

The CBI's latest survey is also likely to add to that pressure. Around 38 per cent of small and mediumenterprises (SMEs) said total new orders were down over the past four months. Failure to anticipate the change damaged confidence among SMEs, causing them to "significantly revise" predictions for the next four months.

"Smaller manufacturers are disappointed. The recession maintains a tight grip despite the confident expectations of last quarter," said Simon Bartley, chair of the CBI's SME Council.

He said smaller manufacturers now expected a "more gradual and protracted recovery" than they had hoped for earlier this year. SMEs expect orders and output to stabilise, whereas larger manufacturers anticipate a small pick-up.

Recent data showed that manufacturing output in the UK slumped by 5.5 per cent in June, the worst fall for more than two decades. Some of the fall was attributed to factory shutdowns during the Queen's golden jubilee celebrations and the football World Cup.