Expectations of a series of interest rate cuts soared yesterday after it emerged that the Bank of England's Monetary Policy Committee voted unanimously at its last meeting to lower borrowing costs.

Economists expect the next rate cut to come as soon as January 10. The bank reduced rates by a quarter-point to 5.5 per cent on December 6, but the City saw an abrupt shift in the tone of the debate among the MPC as signalling that multiple cuts are now in the offing.

Money market rates dropped sharply and the pound fell below $2 for the first time in three months as, in a shift of stance, the rate-setting MPC said that a “substantial loosening of policy” might be needed to head off the risks to economic growth from the credit squeeze.

MPC members had not voted 9-0 for a cut in rates since late 2001. The remarkably doveish minutes of its December meeting released yesterday showed that worries over oil prices and inflation expectations are now playing second fiddle to fears over a deepening financial crisis. Some economists still believe, however, that the Bank will hold off cutting rates until its inflation concerns are laid to rest.

A key worry for the MPC over a severe slowdown in consumer spending next year was aggravated yesterday as the CBI reported that the crucial Christmas season has got off to a weak start, with industry forecasting that sales would continue to worsen in the new year.

Members of the MPC also said that the housing slowdown seemed “more pronounced than expected”, adding that lending to households was clearly slowing and that commercial property prices had fallen for four months in a row.

A report from the Royal Institution of Chartered Surveyors today adds to the housing gloom. It predicts that property inflation will be flat next year and forecasts that repossessions will rise from 30,000 to 45,000.

Yesterday's release from the Bank helped propel one-month interbank-offered rates down at their fastest pace in five years, to 6.30 per cent from 6.49 per cent the day before. Three-month rates fell to 6.21 per cent from 6.39 per cent.

Alan Clarke, of BNP Paribas, said the MPC's unanimous vote, and the fact that the committee had discussed the possibility of a deeper cut, pointed to a second rate cut next month.

He said: “Despite the lingering threat from inflation, far and away the biggest concern for the MPC is the prospect of an undesirably sharp slowdown in the economy.”

The minutes showed that the MPC believed that rates were “already restrictive” at 5.75 per cent. Michael Saunders, of Citigroup, said: “This may be the first time that the MPC has given a collective view of where a neutral policy rate is. If 5.75 per cent was restrictive, then it is unlikely that 5.5 per cent is neutral.”

The case for another cut was strengthened yesterday by the news that sales grew at their slowest pace in more than a year during the first half of December. Only 8 per cent more companies reported a year-on-year rise in sales than reported a drop, the lowest such balance since November 2006, according to the CBI's monthly report into the sector.

Sales of shoes, boots and leather goods suffered especially badly, the survey found, while sales fell among booksellers and in sectors linked to the housing market, such as furniture and DIY kit.

In another sign that worries over the credit crisis are spreading gloom across the economy, 5 per cent more retailers said they now expected a drop in sales in January than forecast a rise, the first time that expectations have been negative since April 2006.

Karen Ward, UK economist at HSBC, said; “This is the first indication of how the key Christmas shopping period is shaping up, as this survey was conducted in the first half of December. It shows that demand is weakening, albeit reluctantly.”

The survey showed stocks of goods continued to pile up as demand fell short of expectations, in a possible signal that retailers may begin discounting their products as Christmas approaches and in the weeks beyond.

Central Control

Signs have emerged that action by central banks to ease intense stresses in money markets may be beginning starting to alleviate the problems caused by commercial banks’ hoarding of cash.

After moves by central banks to flush markets with liquidity, demand for three-month euro funds from the European Central Bank in a regular auction was the lowest ever. For the first time, banks did not take up the full amount available from the ECB, which lent at rates as low as 4 per cent. Traders saw this as a hopeful sign that credit market tensions may be dropping, although there was still strong demand for dollars in the ECB’s first auction of US funds.

In the US, the Federal Reserve auction of $20 billion (£10 billion) in a special operation saw strong demand, with bids by 93 banks worth $61.1 billion, resulting in the funds being allotted at a higher-than-expected rate of 4.65 per cent.

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