The odds on a cut in interest rates have shortened after data from the High Street and manufacturing sectors cast a cloud over the UK economy.

City experts believe the Bank of England may reduce the cost of borrowing to 3.5 per cent next month as its patience with the pace of growth finally runs out.

That view was backed by a CBI study showing manufacturing firms still mired in recession after orders in May remained significantly below normal.

The CBI said the benefits of a more competitive pound had not yet helped exporters and that a cut in rates was needed to lift confidence.

On top of those woes, official data showed UK consumers reined back on spending during May, with retail sales volumes 0.1 per cent lower than April.

Sales at food stores and clothing and footwear shops bore the brunt of the weaker performance.

Investec economist David Page said: "While this shouldn't herald a collapse in consumer activity, it is a further reminder of a slowdown.

"It is also likely to be sufficient to convince the Bank's Monetary Policy Committee (MPC) of the need for a further spur to the economy."

He added that the impact of higher National Insurance contributions on pay packets last month may also have acted to put a dampener on spending.

The bank's last two MPC meetings have been delicately balanced, with fears over the impact on the housing market proving enough to stave off a cut.

Those concerns over household and consumer debt are likely to remain after separate figures showed mortgage lending reached a new record during May.

The Council of Mortgage Lenders said the strong rise in home loans - total mortgage lending was £21.5 billion during the month - was driven by people remortgaging to take advantage of low rates.

Credit card lending also rose by a new record of £506 million during May but other unsecured lending was more subdued, the British Bankers' Association added.

There was also grim news for Chancellor Gordon Brown after the UK's public sector net cash requirement reached £5.8 billion in May, up from the £2.8 billion figure seen a year ago.

That was higher than City expectations and reflected declining tax receipts and higher Government expenditure.

Friday June 20, 2003