Interest rate monitor: Interest rates to fall to record low
On Thursday the Bank of England's monetary policy committee (MPC) announces the outcome of its monthly meeting deciding whether to lower, hold or raise interest rates.
Sarah Routledge assesses the current economic situation to work out what might be running through the heads of its nine members in the run-up to January's meeting.
December's decision
Last month, the Bank of England slashed interest rates by a further one per cent to two per cent.
A fall in the consumer price index (CPI) the measure of inflation, combined with gloomy economic news helped persuade the Bank's MPC another reduction in the base rate was needed.
In the minutes of the meeting, it was revealed the decision was once again unanimous, although arguments were put forward for even larger cuts.
The UK economy
Retail
Late November and December is the most important period of the year for most retailers - seeing the majority of their year's trade - and there were fears a lack of consumer confidence would stifle the usual festive spending frenzy.
Although some forecast a last-minute surge, retailers were not prepared to take the risk and many staged discounting events in advance of the traditional January sales.
The Confederation of British Industry (CBI) found just 13 per cent of firms said sales volumes were higher in the first half of December compared with a year ago, while 67 per cent said they were lower.
The resulting rounded balance of -55 per cent is worse than retailers had expected (a balance of -40 per cent) and is the weakest recorded since the survey began in 1983.
The British Retail Consortium (BRC) said UK retail sales values fell 2.6 per cent on a like-for-like basis, from November 2007, when they had risen 1.2 per cent.
Total sales were lower than a year ago, as in October - the first time since the survey began in January 1995 that sales declined for two consecutive months.
The Office for National Statistics (ONS) figures show November's total sales values were up 2.9 per cent on a year ago, at odds with the BRC.
Property
House prices plummeted by a record 16.2 per cent in 2008, according to the Halifax, as £37,000 was wiped off the value of the average home.
According to Nationwide's index, house prices fell by 15.9 per cent over the year, taking the average home down to 2005 levels at £153,048.
The figures from both surveys confirmed a sharp drop in December prices from last month, indicating house prices still have a way to fall before bottoming out.
Both groups were wary about making specific forecasts but predict further falls in 2009 and suggest the Bank of England will be prepared to take the interest rate yet lower in an effort to encourage lending.
Economic growth
The UK economy shrank for the first time in 16 years between July and September, figures from the Office for National Statistics show.
The UK's GDP was revised downward last month and economists believe it fell by 0.6 per cent over the third quarter, bringing the country closer to recession. If the fourth quarter growth is also negative, with some economists predicting a one per cent fall in GDP, the UK will have been in recession since July.
Consumer confidence
Consumer confidence rose further in December to -33 as confidence in the 'major purchase' category improved, GfK NOP said.
Rachael Joy in the consumer confidence team at GfK NOP, said: "UK consumers have become even less confident about the future economic situation but, among these historically low levels of confidence, there is perhaps a glimmer of hope: for the second month running, there has been an improvement in the number of consumers who think now is a good time to make a major purchase, suggesting that high street deals and the small reduction in VAT have improved consumers views on this area.
"The crucial question for the economy is whether the improvement in this index will be translated into activity on the high street during Christmas and the January sales."
Inflation
After peaking at 5.2 per cent in September, the consumer price index (CPI) fell sharply to 4.1 per cent in November, down from 4.5 per cent in October.
Transport costs were the biggest downward pressure, as the price of oil fell dramatically.
The danger is now deflation, according to the Bank of England, which could cause a spiral of lower prices and shrinking demand, potentially leading to more job losses. The cut in VAT on December 1st will also push down prices.
This week's decision.
.is likely to be another cut.
The Bank of England has been under pressure to act decisively and cut the interest rate as the economy slumped, exposing the biggest threat as deflation.
Inflation has fallen dramatically over the last two months and is likely to fall further as consumers anticipate price cuts from ailing retailers.
Another interest cut therefore seems likely, as the MPC attempts to keep to its two per cent target.
If there is, the Bank of England's base rate will fall below two per cent for the first time in its history.
Although recent cuts have been large - one per cent last month and 1.5 per cent in October - given the significance of this decision, the MPC may vote a smaller reduction of a half or a quarter of a per cent.
However, many economists now believe the interest rate is headed to zero per cent, so a larger cut cannot be ruled out.
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