Contact: Jo Ouvry
Deloitte
Public Relations
+44 (0) 20 7303 0587

Although the Monetary Policy Committee decided to leave interest rates on hold at 4.75% for the tenth consecutive month today, the recent weakness of the economic data suggests that the first cut in rates is not too far away.

It seems that the housing market has stabilised, with prices on the Nationwide index rising by a monthly average of just 0.2% in the six months to May. But this has not stopped the annual growth rate falling to an eight-and-a-half year low of 5.5% in May, thereby reducing consumer confidence.

Accordingly, consumers have become more cautious, raising their credit card borrowing by just £0.3bn in April compared to the average increase of £0.8bn in the previous six months. And although retail sales rose by a respectable monthly 0.5% in April, the underlying trend remains weak, with sales increasing by a paltry 0.2% in the last three months.

The labour market has also started to put consumer finances under pressure, with the claimant count measure of unemployment rising for the third month in a row in April. What’s more, the annual growth rate of average earnings growth, excluding bonus payments, has fallen in each of the last five months, from 4.5% in October to 4.0% in March.

What’s more, the consumer slowdown has started to reach other areas of the economy too. Although manufacturing output rose by a monthly 0.9% in April, this reversed only part of March’s drop and left output down by 1.4% in the last three months together compared to the three before.

Accordingly, whereas the MPC started raising interest rates in 2003 to bring an end to the two speed economy – modest growth in the industrial sector and rampant growth in the consumer sector – it now looks as though the end result could be no speed at all.

With CPI inflation unlikely to rise much further above April’s 1.9%, I do not think it will be too long before the MPC starts to cut interest rates, with August’s meeting the favourite. And even if it takes a little longer, rates are still going to be falling by the end of the year.

Furthermore, given that rates reached a low of 3.5% in 2003 when the housing market and consumer spending were strong, it is reasonable to suppose that, in a weaker economic environment, rates will return to this level by the end of next year. And it is possible that they could eventually fall even further.

Roger Bootle
Economic Adviser
Deloitte

Ends

About Deloitte
In this press release references to Deloitte are references to Deloitte & Touche LLP.

Deloitte & Touche LLP is the UK's fastest growing major professional services firm based in 21 UK locations, with over 10,000 staff nationwide and fee income of £1,246 million in 2003/2004. It is a member firm of Deloitte Touche Tohmatsu, a leading professional services organisation, delivering world class audit, tax, consulting and corporate finance services, with around 120,000 people in over 140 countries. Deloitte Touche Tohmatsu is a Swiss Verein, and each of its national practices is a separate and independent legal entity.

Deloitte & Touche LLP is authorised and regulated by the Financial Services Authority.

The information contained in this press release is correct at the time of going to press.