Flat retail prices last month and evidence of a further slowdown in manufacturing industry fuelled hopes yesterday that more cuts in base rates are on the way.

With headline inflation down slightly in November, Britain has enjoyed the longest peacetime run of low inflation since the Thirties. Inflation has stayed below 4 per cent for 38 months.

In another sign of the weakness of inflationary pressure, the Confederation of British Industry said members were predicting slower growth in the new year. According to its monthly survey, the balance of firms expecting output to rise rather than fall was down to its lowest since the beginning of 1993.

Sudhir Junankar of the CBI said: "We would probably recommend a further interest rate cut if this slowdown continues, as long as the inflation outlook remains sound."

However, there was a brighter note from the House Builders' Federation yesterday. The day after mortgage rates fell to their lowest in a generation, it said the housing market was poised for recovery.

The Government's confidence in inflation prospects was demonstrated yesterday by a Bank of England announcement of consultation about reforms that will allow the issue of more index-linked gilts.

Andrew Roberts, gilts expert at UBS, said: "The Government should issue as much index-linked stock as they can if they believe their own inflation forecast." There would be less interest to pay as long as inflation stays lower than the financial markets expect.

City economists said the encouraging figure for retail prices in November cleared the way for more base rate falls. The head- line rate of inflation fell from 3.2 to 3.1 per cent. The target measure, excluding mortgage interest payments, was unchanged at 2.9 per cent.

Cheaper cars, pre-Christmas special offers on alcohol and a decline in seasonal food prices offset higher prices for other goods and services in November.

The CBI survey showed a balance of 2 per cent of firms expecting higher rather than lower output in the next four months.