THE Bank of England is expected to cut interest rates by a further 1% this week as evidence mounts of a growing crisis on the high street.
The Bank's Monetary Policy Committee will give the economy an extra shot in the arm by reducing rates to 2%, as economists warn that even sales of up to 95% at some top retailers are failing to entice shoppers into the stores.
Retail analysts expe
ct high street footfall figures out tomorrow to show that cash-strapped shoppers are staying away in droves despite this month's desperate sales tactics, which began with Marks & Spencer's one-day 20%-off bonanza but which was quickly followed by a deluge of price slashing elsewhere.
JJB Sports has reduced prices by up to 95% on some of its stock while even high-end department stores such as Selfridges are distributing vouchers offering 20% off for a limited period.
With high street sales on average tipped to fall by as much as 10% over the festive season, economists say Bank of England governor Mervyn King and his colleagues will have little choice but to make another dramatic cut when they meet this week, following their shock decision to lower rates by 1.5% on November 6.
"Not just around the UK, but around the world, the data keeps getting worse," said Richard Dingwall Smith, chief economist at Scottish Widows Investment Partnership. "Ultimately it's possible UK rates, like those in the US, could go down to virtually zero."
The European Central Bank is also under intense pressure to make a bold decision on rates on Thursday after data showed the Eurozone entered a technical recession between July and September. Economists are forecasting a cut between 0.5% and 1%.
Last week Chancellor Alistair Darling announced a temporary 2.5% reduction in VAT, effective from tomorrow, in an attempt to revive consumer spending. But economists warn it will make no difference to shoppers who are already being bombarded with greater savings.
Leading retail analyst Nick Bubb of Pali International said this month's extreme sales tactics are a harbinger of the deep pain to come on the high street. There are warnings that Britain is at risk of slipping into a deflationary cycle in which shoppers continue to delay purchases as they know prices will be lower the following week.
Bubb said: "Consumers tend to back off and wait for another sale so it's ultimately counter-productive."
Further retail failures are expected in the new year following last week's collapse of Woolworths and MFI.
Analysts are sceptical Woolies can be revived and warn individual shops are more likely to be sold off to supermarkets such as Iceland and Tesco.
"We are going to see some of the property sold off and put to much more profitable use," said Neil Saunders of Verdict Research. "The business still has a huge question mark over it. It's not really a viable business model which is why it failed in the first place."
Sage of HBOS predicts trouble at Deutsche BankNathalie ThomasCOLIN McLean, the feted fund manager who sounded the alarm over HBOS a year before its demise, believes that Deutsche Bank will be next in line for a Government bailout.
The managing director of Edinburgh-based SVM Asset Management has warned that the German bank, one of the biggest employers in the City of London with 7,000 staff, still has high exposure to risky assets such as credit default swaps (CDS) which precipitated the collapse of Lehman Brothers in September.
He expects Deutsche will be one of four banks across Europe that will be forced to go cap in hand to taxpayers over the next 12 months as the continuing fall-out from the credit crisis limps on well into the New Year.
"The overall risks in a number of major European and US banks are still quite high," he told Scotland on Sunday. "There's been more coverage on Citigroup but there are at least four European banks which have got very big balance sheets with quite a high exposure to the CDS and other derivatives that triggered the present crisis. At the moment there doesn't seem to be a lot of recognition that a bank such as Deutsche Bank has got some similar problems."
McLean declined to name the other banks in further trouble, but hinted Barclays might be among their number even though shareholders voted through its latest £7bn fundraising last week.
"Of the major banks across Europe that have not so far gone for significant liquidity and equity support (from European governments], it will be surprising if they prove to be much better managed or more adroit at avoiding the problems than those that already have," he said.
McLean last week made his first investments in the banking sector for over a year, backing HSBC and Lloyds TSB, despite his pessimism over selected institutions. He said HSBC has avoided many of the riskier lending areas that have damaged other banks. Although it may be forced to raise further equity, he expects it to prove a safer bet in the medium-term.
SVM is forecasting that Lloyds should be in a position to resume dividend payouts after a year. "It may quite reasonably be a healthy market for some of these banks by 2010," McLean said. "They should be able to restore profits."
McLean is one of two high profile fund managers to have returned to assets currently shunned by most other investors. It was revealed earlier this month that John Paulson, the American hedge fund manager who increased returns sixfold by betting against sub-prime mortgages before the rest of the market realised the extent of the problems, has started buying debt backed by home loans.
