Quarter-point cut leaves room for more next month

THE BANK of England cut interest rates by a quarter-point to 6 per cent yesterday, the fourth reduction in as many months. But business and unions alike reacted by demanding more.

Kate Barker, chief economist at the Confederation of British Industry, said: "Further interest-rate cuts will be needed to ward off the danger of outright recession."

John Monks, general secretary of the Trades Union Congress, agreed with the employers' organisation. "Interest rates are still significantly higher than in the Eurozone," he said, calling for a reduction to 4 per cent by the middle of the year.

Most City analysts concluded yesterday that the Monetary Policy Committee (MPC) would opt for another reduction next month. The latest figures and surveys suggest that the UK economic slowdown is spreading beyond the hard-hit manufacturing sector. By early next month there will be clearer evidence of how the economy performed in the final quarter of last year.

"They are right to move cautiously, but rates will trend down to 5 per cent by the middle of the year," said Paul Turnbull, UK economist at Merrill Lynch. David Walton at Goldman Sachs said: "The MPC can head off the risk of recession." There would be no inflationary danger in cutting rates further at present, he said.

In its statement, the Bank cited continuing economic slowdown, signs that the jobs market had stopped tightening, and the possibility of an international slowdown. There were signs that upward pressures on pay had eased. The statement said: "The risks from the international environment remain clearly on the downside."

The rate cut coincided with a mixed set of figures from the high street. The latest distributive trades survey from the CBI showed that sales volumes edged up in December, roughly in line with retailers' expectations. Sales are expected to continue improving in January, although levels are low and the underlying trend still flat.

The survey showed that 41 per cent of retailers reported an increase in sales in December compared to the same time a year ago, while 37 per cent said sales were down. This left a positive balance of 4 per cent.

Growth was strongest in footwear, leather goods, groceries and books, but there were sharp falls in big-ticket items such as furniture and carpets.

Alastair Eperon, chairman of the CBI's distributive trades panel, said continued growth would depend on the success of the January sales, and that further interest-rate cuts were needed. The British Retail Consortium echoed this - Ann Robinson, its director general, said: "The hope is that a further reduction in mortgage costs will put consumers in a better frame of mind and encourage them to start spending."

Littlewoods added to the high-street gloom when it reported a slowdown in retail sales growth over Christmas. Underlying sales in the nine weeks to 2 January increased by just 2 per cent compared with the 8 per cent achieved in the first half of the 1998/99 financial year. The company said that although the new year sales got off to an encouraging start, the consumer market showed no sign of improvement.

There was better news elsewhere, with Electronics Boutiques, the computer games retailer, reporting strong underlying sales growth. Clinton Cards, the greeting cards retailer, reported buoyant demand.