Hopes fade for interest rates cut

An increasingly unbalanced economy and the surge in government borrowing will scupper any lingering hopes of the Bank of England cutting interest rates this week and for the foreseeable future.

Although Thursday's Monetary Policy Committee (MPC) decision will be taken against a backdrop of crumbling company profitability, the Bank is expected to move to a more neutral position. Meanwhile, in Frankfurt, the European Central Bank is set to give some relief to German industry by cutting its key policy rate by as much as 50 basis points to 2.75 per cent.

City economists predict that by the time Mervyn King takes up his position as Governor in June, he may be pushing for a rise in rates. Inflation remains just below target, but is expected to increase with a booming housing market.

Statistics due to be released by major mortgage lenders are expected to show that house prices continued to move ahead in November.

Alex Bannister, housing market analyst with Nationwide building society, predicted that Nationwide's price index would show similar trends to those recorded in October. Prices rose by an average of 1.4 per cent that month and 24 per cent over the year to October. Halifax bank recorded sharper increases in October; 4.7 per cent over the month and 30.6 per cent over a year.

Consumer debt last month alone was worth one per cent of annual GDP. King has warned that recent increases cannot be sustained. However, there is evidence that consumers are putting themselves at risk of a crash by borrowing more money against the increasing value of their houses to fund Christmas spending sprees.

Meanwhile, industry is suffering. Latest figures show that corporate profitability slumped for the 13th quarter in a row in the second quarter of this year, the latest period for which audited financial results are available.

The Experian Corporate Health check shows that overall profitability stood at 7.57 per cent, down 50 per cent on the peak in 1999. Business failures are up 12 per cent on the year to October. The Engineering Employers Federation will say in its quarterly report that it expects recession in the sector to last until the second half of next year.

A spokesman said: 'At the beginning of this year we hoped for recovery in the second half, but that has not materialised. All the main indicators have continued to point down.'