Interest rates could be slashed to a bargain 2% on Thursday after an expected torrent of bad economic news from eight key indicators over the next three days.
Interest rates could be slashed to a bargain 2% on Thursday after an expected torrent of bad economic news from eight key indicators over the next three days.
But further doubts over the chancellor's VAT-cutting strategy to stimulate consumer spending emerge today with the publication of a shopping index which shows retail footfall in November down 5% in Scotland on a year ago, and down 0.9% for the UK as a whole, despite already massive discounting in the shops.
Bank of England governor Mervyn King has already signalled that rates will fall "more than they would normally have done" because of extreme pressures, and one poll of economists yesterday was in the majority for a 0.5% cut this month to 2.5%.
But rapidly disappearing inflation could open the door to a bigger cut. A Citigroup/YouGov survey today finds inflation is expected to be just 0.9% over the next 12 months, down from 2.9% in its October survey and 4.4% in September. Citigroup suggests "it may not be long before people start expecting prices to fall, thereby increasing the risk of deflation - this boosts the case for the Bank of England to cut interest rates by a sizeable amount next Thursday, and we believe a reduction from 3% to 2% is highly possible."
Philip Shaw, of Investec Securities, said the November minutes of the Monetary Policy Committee suggested that the cut would be between 0.5% and 1%, but he believed that, following the pre-Budget tax cuts, "the committee may aim for the bottom of this range".
He added: "Additionally it may want some time to evaluate the path of the economy and to keep some of its powder dry to provide good news further ahead."
But Howard Archer, chief UK and European economist at IHS Global Insight, said there was "a very strong chance" of a 1% cut.
"Much could yet depend on just how bad the data and survey evidence are over the next few days, although the clear serious weakness of the economy and sharply retreating inflationary pressures provide strong grounds for another large interest rate cut anyway."
Ross Walker, UK economist at Royal Bank of Scotland, is expecting a 0.75% cut this month, with the base rate falling to a low of 1.5% by February. Figures released since the last MPC meeting have shown consumer spending falling at its fastest rate for 13 years, manufacturers' output expectations at their weakest for nearly 30 years, and inflation dropping at its fastest rate for 16 years.
Today sees the Bank of England release figures on consumer credit, mortgage lending and loan approvals, while the purchasing managers' index for manufacturing, construction and services, along with the Nationwide consumer confidence index and the Halifax house price index, will all be published before the MPC announces its decision on Thursday.
Archer said he expected a continuing deterioration in all indicators, and while the rate of house price fall would probably ease from 2.2% in October to 0.8%, this was "not seen as marking the start of an improving trend for house prices".
On exporters, who loom large in Scotland, he said: "While the substantially weaker pound is helping UK manufacturers, this is being more than offset by sharply deteriorating domestic demand in key export markets, notably the eurozone and the US."
The construction and service sector indicators were likely to slide to another new low, while consumer confidence was likely to dip again after a surprise rally in October.
In the retail sector, meanwhile, shopper visits are down on last November despite "the extraordinary level of pre-Christmas discounting and unprecedented one-day "spectaculars", according to credit agency Experian.
Its retail footfall index finds Scottish shoppers the wariest in the UK, with visits down 5% against a UK average of 0.9%.
"From a UK wide perspective, it seems efforts at deep discounting have failed to attract significant shopper numbers into the stores," said Jonathan De Mello, the agency's director of retail consultancy. "Deep discounting by retailers may have also brought forward shoppers from December into November and set back the traditional Christmas rush by at least a week."
De Mello added: "It is possible that purchasers of major items will have held back until the government's lowering of VAT by 2.5% takes effect in December. However, these are unprecedented times and it remains to be seen whether this new government initiative translates into a boost in shopper numbers or higher consumer spending in the run up to Christmas."
Experian's insolvency index for the sector reports a 21% rise in casualties in November, including MFI and Woolworths.
