Dire M&S makes rate cut a certainty
If the Bank of England wanted a clearer signal for a cut in interest rates tomorrow, today's dismal statement from Marks & Spencer has just provided it.
Britain's biggest store retailer reports its worst quarterly sales performance for a decade.
It is closing 27 stores and shedding 1,230 jobs in a bid to save money in a tough trading environment. The bulk of the cuts are set to come in its Simply Food stores - the ones that I - and hundreds of thousands of others - stopped visiting as food prices soared last year. Convenient, yes, and enticing items - that, too. But the price of even a few items in the shopping basket was getting ferocious.
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However, it's not the 7.1 per cent fall in UK like-for-like sales in M&S's third quarter to December 27 that will trouble the MPC.
It is that thousands of other retailers without M&S's marketing and promotion muscle - it serves more than 21 million customers a week from over 600 stores - will be faring much worse.
That - and the blunt warning from M&S executive chairman Sir Stuart Rose that "we expect challenging conditions to continue for the next twelve months".
It's both the likely length of the recession as well as its depth that is now worrying the Bank's Monetary Policy Committee.
It starts its monthly policy meeting today. Tomorrow should bring an announcement that it is cutting interest rates to their lowest level since it was set up in 1694.
It is expected to cut the official policy rate by 50 basis points to 1.5 per cent. The case for further easing is clear from the relentless flood of dire economic news, the steady flow of job losses and corporate bankruptcies. "At best", says Citigroup economist Michael Saunders this morning, "the economy faces a deep recession this year: at worst, a downturn that exceeds any seen in the last 60 years."
A 50bp cut would bring Bank Rate to the lowest since the BoE was established in 1694. The low of the 1930s was two per cent, the same level as now.
However, such comparisons will not prevent the MPC from cutting. With wide credit spreads, the overall level of interest rates for households and companies currently is well above both Bank Rate and interbank rates.
And the outlook is getting no better for the banks - look at the Royal Bank of Scotland share price today - down another 5.7 per cent to 48.1p as I write. This financial crisis is far from over.
Given the dire outlook for the economy there is a case for the MPC to cut more aggressively than 50 basis points. However, the possibility of alternative measures – funding policy or quantitative easing – is growing. Tomorrow' announcement, says Saunders, will be " a staging post" for further action.
However, it is the prospect of further action world wide that has been lifting stock markets generally. Share prices round the world have now risen for ten days in a row - the longest such run in more than five years. There were big rises in Asia overnight on hopes that massive US government spending and tax cuts in the imminent stimulus package will continue to support the dollar and stimulate demand for exports.The US dollar was heading for a fourth day of gains against the euro on hopes US President-elect Barack Obama will soon unveil a package of spending and tax cuts worth around $775 billion.
Why so big? The state of the US economy is no less miserable. Minutes of the recent Federal Reserve interest rate meeting showed that officials believed the US economy could weaken substantially further even with benchmark rates between zero and 0.25 per cent, and that the near zero interest rate regime will need to be in place for a considerable time.
However, the dollar has continued strong on hopes that America, first into this epochal downturn, will be the first to show recovery later this year.
Ours - judging by the bleak statements from M&S and others - will take longer.
