• The Monetary Policy Committee maintained the historical precedent of never having changed interest rates in March by leaving them at 4.5% today. But with the recent data casting a question mark over the strength of the recovery in the consumer sector and showing that inflation is back below its target, I still expect that rates will be cut to 4% this year.
• The sharp 1.3% monthly drop in retail sales in January dented previous hopes that a consumer recovery is underway. And the fall in the reported sales balance of the CBI Distributive Trades Survey from -11 in January to -18 in February decreased the chances of a robust bounce-back in February.
• Also on the soft side, while claimant count unemployment fell (by 2,000) in January for the first time in a year, employment on the ILO measure dropped by 56,000 in the three months to December, the biggest quarterly fall since 1993.
• Meanwhile, there are still few signs in the average earnings data of any knock-on effects on wages from last year’s rise in inflation, with headline earnings growth picking up only slightly in the three months to December and on the measure excluding bonuses, holding steady.
• And CPI inflation itself is now back below the 2% target rate after being revised down to 1.9% in December and remaining there in January, although the recent gas and electricity price hike announcements by a number of domestic suppliers mean that inflation may not fall further in the next few months.
• Admittedly, there have been some signs of a long-awaited improvement in the industrial sector, with both the CBI and CIPS surveys now pointing to a fairly decent recovery from the 0.8% contraction in production seen in Q1. And aside from Steve Nickell, who has voted for lower rates in each of the previous three months, no one on the Committee appears to consider the arguments for lower interest rates very persuasive. 
• But provided that GDP growth remains at or below its trend rate while core inflation pressures continue to weaken in response to the spare capacity in the economy built up over the last 18 months, I think that a further modest loosening of monetary policy is required to prevent inflation from persistently undershooting its target. Rates may be cut by 0.25% in May, and by a further 0.25% later in the year.

Ends

Notes to editors
This press release has been prepared by Roger Bootle, Economic Adviser to Deloitte. If you have any questions regarding the views in it, please contact Roger Bootle directly on 020 7823 5000 or via email on business@capitaleconomics.com.

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