Rate-rise prospects recede

THE odds on a February increase in interest rates have lengthened dramatically following confirmation of a disastrous Christmas from several retailers, a fresh slump in manufacturing and sterling's surge against the dollar and euro.

City economists, who considered a rise in the cost of borrowing next month all-but inevitable, are now scaling back expectations.

They say more weak data before the Bank of England's monetary policy committee (MPC) meets under Governor Mervyn King on 4 and 5 February could tip the balance in favour of rates staying at 3.75% for a third month.

'We are getting a little less confident about our forecast of a February rate hike by the day,' said Philip Shaw at Investec. 'The MPC's concerns over rapid economic growth and house prices should lead to an increase but it's by no means a done deal.'

Simon Rubinsohn at broker Gerrard added: 'On balance, we are still edging towards a rate hike but we're not convinced it will happen.'

Following the MPC's decision to freeze rates last week, the City has been hit by a barrage of disappointing news.

Driven by a sharp fall in women's clothing, Marks & Spencer yesterday said like-for-like sales fell 2.3% in the seven weeks to 10 January, confirming reports of a dire Christmas on the High Street. Discount retailer Matalan chipped in with a profits warning.

On Tuesday, official figures showed a shock 0.7% slump in manufacturing output in November, casting doubts on surveys pointing to an industry revival.

Meanwhile, sterling has climbed to 11-year highs against the battered dollar and two-month peaks against the euro, helping to bear down on any emerging inflationary pressures and reducing the need for higher rates.

Economists said forthcoming key data on retail sales, inflation, gross domestic product and consumer-debt could still sway the MPC one way or the other.

Deutsche Bank's George Buckley said it would be a close call, adding: 'We are reserving judgment until we have seen all the data.'

Next month's quarterly Inflation Report could provide the MPC with the perfect opportunity to push through an unpopular rate rise, however.

Investec's Shaw said: 'The advantage of moving in February is that the Inflation Report and accompanying Press conference give the Bank the chance to explain its actions in detail.'