London Briefing:All eyes in the retail sector today will be on the newly knighted Marks & Spencer chief, Sir Stuart Rose, as he reveals just how the grand old lady of the high street fared over Christmas, writes Fiona Walsh.

Tomorrow will be Justin King's turn, as Sainsbury's becomes the first of the major food retailers to detail its festive performance for the market.

A good Christmas is crucial for both companies, each of which is nearing the end of lengthy recovery programmes after the mismanagement of previous years.

However, while retail analysts will pore over the figures for M&S, Sainsbury's and the rest of the stores sector in the coming weeks, they are now largely of academic interest.

Far more important than Christmas past is the first quarter still to come - and for that, prospects look more grim by the day. The retail sector had a miserable year in 2007, not helped by five interest rate rises and the growing gloom in the housing market.

Figures earlier this week from the British Retail Consortium showed that, for once, the traditional pre-Christmas whingeing from stores bosses had some justification: with underlying growth in sales of just 0.3 per cent last month, it was the worst year-on-year performance in December for three years.

In some sectors, such as clothing and footwear, sales moved into negative territory.

Not surprisingly, stores shares have taken a battering in the first few days of the new trading year, but it is the fear of worse still to come that is really haunting the market.

Christmas sales were down by just over 3 per cent at Next, although the fashion retailer reassured the market that it would meet profit expectations. However, chief executive Simon Wolfson said he was "extremely cautious" on prospects for the year ahead.

The company, which has shown no sales growth for the past two years, will be unlikely to return to growth in the current year, he warned.

At the Dixons, Currys and PC World group, DSG International - Britain's largest electrical goods retailer - Christmas trading was miserable enough to blow a £50 million hole in profit forecasts.

Shares in the group, which until last month was a constituent of the FTSE 100 index, crashed more than 20 per cent in response.

PC World was the worst performer within the group, with sales falling by 10 per cent as customers shunned purchases of desktop computers and laptops.

There was an even more dramatic reaction at sofas group Land of Leather, which saw its shares slump by more than 50 per cent as it issued a shock profits warning. Putting the blame squarely on the slowdown in consumer spending in the aftermath of the credit crunch, it said that its dwindling band of customers was trading down to less expensive models and warned that profits will fall significantly short of last year.

It's not just the retail sector - shares in budget airline EasyJet suffered their worst one-day fall in more than 3½ years yesterday. While its passenger statistics for December revealed that while numbers were up last month, largely as a result of new routes, it is struggling to fill its aircraft.

The City of London, meanwhile, is facing its toughest time in a generation, with banks and building societies bracing themselves for the sharpest fall in profits since the recession of the early 1990s, according to a recent survey.

All of which makes the task of the Bank of England's Monetary Policy Committee, which meets this week to decide on UK interest rates, even more difficult than usual. The committee starts its two-day meeting today and will reveal its decision at noon tomorrow.

Retailers and the manufacturing industry are calling for a cut of at least quarter or even half a point in rates from their current 5.25 per cent, warning that recession is inevitable unless there is a pick-up in consumer confidence.

As usual, however, the committee will have to balance the impact of a cut in rates on inflation.

Inflationary pressures are being stoked not only by higher mortgage payments, but by the 15 per cent jump in fuels bills faced by millions of British households after Britain's fourth largest energy supplier, Npower, said it was raising its prices. As oil hovers around the $100 a barrel mark, rival energy providers are expected to follow Npower's lead.

On balance, the MPC is expected to resist calls for a rate cut this month, but, with few signs of relief amid the economic gloom that has shrouded the start of the new year, it could soon decide that the risk of inflation is outweighed by the growing threat of recession.

Fiona Walsh writes for the Guardiannewspaper in London