Spending on the high street is beginning to show signs of a slowdown as consumers tighten their purse strings and retailers cut prices, ahead of the Bank of England's decision tomorrow on whether to cut interest rates.

According to the British Retail Consortium (BRC), shop prices fell from a 0.4 per cent rise in February to a 0.2 per cent increase in March. The annual rate also declined, from 1.3 per cent in the previous month to 1.1 per cent in the 12 months to March.

The slowdown in price rises may ease the way for a reduction in borrowing costs tomorrow as it heralds a cooling of inflationary pressure, a factor that has concerned the Bank of England's rate-setting Monetary Policy Commitee.

Howard Archer, chief UK and European economist at Global Insight, said: "The easing back in the BRC deflator in March suggests that retailers are becoming less confident in their pricing power as the pressures on consumers mount.

"This is an encouraging sign for the Bank of England and facilitates a 25 basis point interest rate cut."

Evidence emerged today that UK manufacturers are weathering current economic difficulties better than expected, and are taking advantage of the weakness of the pound which this morning reached an all-time low of 80p against the euro.

Manufacturing output grew by 1.9 per cent year on year, the highest annual growth since 2006, although analysts warned that the figure was slightly inflated because of a sharp fall in manufacturing last February. Total industrial output grew by 0.3 per cent, after falling 0.1 per cent in January.

While the manufacturing data will be welcomed by the MPC, analysts said the figures are unlikely to be enough to cancel out the need for a rate cut, although it may be enough to stay the hands of those eager for a half-point cut as opposed to the widely anticipated quarter point reduction.

Mr Archer said: "Healthy manufacturing output in February is unlikely to prevent the Bank of England from cutting interest rates from 5.25 per cent to 5 per cent given the heightened downside risks to the growth outlook stemming from markedly tighter credit conditions and high market interest rates."

Jeegar Kakkad, senior economist at EEF, the manufacturing body, said: "Manufacturers are continuing to defy the economic gloom by reaping the rewards of investment and growing world markets. Having taken tough decisions to improve their performance and competitiveness, we cannot afford to let the problems in the financial sector spill over into the wider economy where the economic fundamentals remain sound."

But he warned that the Bank of England should still move to cut rates: "The Bank must therefore cut rates this week as insurance against further economic weakness."

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