Christmas trading reports are due from

Next Arcadia Dixons Matalan Selfridges Marks & Spencer House of Fraser Signet

Inflation fears

Most economists are expecting the Bank of England to keep rates on hold at 4% when its monetary policy committee meets later this week.

The strong retail sales figures are likely to confirm expectations of an end to falling UK interest rates - particularly after Bank of England governor Sir Edward George last week warned of soaring levels of consumer debt.

To cut rates in the face of evidence of soaring consumer spending would be "very odd indeed," according to Michael Hume, an economist at Lehman Brothers.

A further cut in rates would encourage consumers to borrow and spend even more, possibly triggering inflationary pressures.

Appeal

BRC chief economist Bridget Rosewell said sales growth has now been stable since June, a fact which "must reflect the low and stable interest rates that are currently in place."

The High Street has now had "the longest period of such stability" since 1995, when the survey began, she said.

But she cautioned that "rising unemployment and weak investment are likely to moderate confidence as we move into 2002."

The retail sector "has been seen as the one stable driver of growth in the UK economy" during the 2001, said the BRC's Mr Moye.

Both like for like and total sales for December 2001 were higher than in 2000, with total sales up 8.1% compared to 5.5% growth year-earlier.

Total sales growth in November was 8.2%.

Drink, DVDs and clothing

Trading statements in the next two weeks from a cross-section of retailers are expected to provide further confirmation that British consumers set aside worries over the economy and spent heavily during the run-up to Christmas.

Off-licence chain Majestic Warehouse said on Monday that sales jumped 11.3% between 6 November and 31 December, while retail giant Marks & Spencer is tipped to announce a substantial rise in sales in its Christmas trading statement next week.

Strong demand for clothing is reported to have boosted sales at clothes store Next by up to 10%, while electronics retailers are expected to have benefited from a surge in demand for DVDs.

Stable interest rates?

Between February and November 2001, the Bank of England cut rates by two percentage points in seven steps to a 37-year low of 4%.

The rate cuts, aimed at stimulating the UK economy in the face of the global economic slowdown, boosted consumer spending but were less successful in encouraging business investment.

Although most analysts expect interest rates to start rising few anticipate an increase this week, arguing that the beleaguered UK manufacturing sector remains too fragile to absorb higher borrowing costs for the moment.

"We feel on balance that the UK easing cycle has finished and that the next move in rates is likely to be up, although not for around six to nine months," said Philip Shaw, economist at stockbroker Investec.