A sharp slowdown in the construction sector and weak retail sales during November today added to pressure for the Bank of England to deliver a pre-Christmas cut in interest rates on Thursday.

Construction activity in the economy fell for a third month in a row during November, to its weakest levels since September last year, owing to faltering housing and commercial property markets, according to the latest survey from CIPS.

The report comes as the British Retail Consortium (BRC) reported that November retail sales had recovered only marginally from an 11-month low in October and growth was still significantly below September trading.

The BRC said furniture and DIY sales were flat, suggesting homeowners are cutting back as the housing market continues to weaken.

The data coincides with the resurgent stresses in London's money markets to add extra ammunition to the doveish faction on the Bank's Monetary Policy Committee (MPC) pressing for an early reduction in official borrowing costs.

On Monday renewed strains in the interbank money markets saw one-month interest rates for sterling-denominated lending between banks spike upwards by 0.6 per cent to the highest levels since the end of 1998.

The one-month sterling Libor rate rose further today from yesterday's nine-year high of 6.715 per cent to 6.749 per cent – far above the Bank of England's 5.75 per cent interest rate. European one-month interbank rates also rose to levels not seen since May 2001, while similar stress was apparent in US credit markets. Three-month Libor rose from 6.620 per cent to 6.649 per cent.

Hopes that the MPC's hawks will relent, opening the way for a quarter-point cut in interest rates on Thursday, were boosted by today's construction data.

The CIPS survey's headline index of activity in the construction industry fell to 54.3 for November, down from 57.4 in October, and a very robust 64.8 as recently as August, which was its strongest since February 1998.

CIPS said the headline index was dragged down by a fall in new orders in the construction sector, which also declined for a third month in a row.

The BRC reported that retail sales rose by 3.1 per cent in the 12 months to November, above 3 per cent growth the previous month but below a 4.9 per cent increase in September.

Slow trading at the beginning of November was strengthened when shoppers took advantage of more discounting.

Annual like-for-like sales, which strip out gains from new stores opened during the period, increased by 1.2 per cent last month, compared with 1 per cent in October but below September's 3 per cent rise.

Howard Archer, chief UK and European economist at Global Insight, said: "The relatively soft BRC survey for November certainly keeps the door open for a 25 basis point interest rate cut to 5.50 per cent on Thursday.

"But it is not weak enough to deliver a decisive prod to the MPC to act, given that the Bank of England believes that some slowdown in growth is necessary to dilute inflationary pressures."

Mr Archer added: "Consequently, Thursday's interest rate decision remains balanced on a knife-edge and much could yet depend on the strength of the activity and price indices of the influential purchasing managers' service sector survey for November, which is released on Wednesday.

"At this stage, we still modestly lean towards the view that the MPC will delay cutting interest rates until early 2008, but it is one of the tightest calls that there has been."

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