Brown fuels clamour for Bank to cut interest rates

Monetary policy: Pressure mounts on Bank of England as growth forecasts are slashed

PRESSURE ON the Bank of England to cut interest rates intensified last night after Chancellor Gordon Brown slashed his growth forecast for next year and new figures showed the engineering industry in recession and bankruptcies on the rise.

On the stock market, the FTSE100 Index staged its biggest one-day points rally ever, gaining 205.3 points or 4.4 per cent, as dealers looked forward to a rate cut from the Bank's Monetary Policy Committee on Thursday. It starts its two-day meeting today.

The pound also slipped by a further two pfennigs against the German mark although it rallied later in the day to close unchanged at DM2.7630.

Speaking in Washington, Mr Brown indicated that output next year would fall to 1 per cent compared with the current forecast of 1.75 to 2.25 per cent. Such a sharp slowdown in the economy would inevitably strengthen the case for rate cuts to prevent a slide into recession. It will also put pressure on public finances, leaving the Chancellor with the difficult choice of cutting public spending, raising taxes or letting borrowing rise. The Chancellor's "golden rule" is to borrow only for investment, not to fund current expenditure.

Graham Mackenzie, director general of the Engineering Employers Federation, called for an immediate half-point cut in rates followed by a series of further reductions to bring UK borrowing costs into line with those in Europe.

The Institute of Directors also called for a half-point reduction, arguing that inflationary pressures remained weak while the economy was clearly slowing.

The EEF's latest trends survey reported a decline in engineering output for the second successive quarter along with an accelerating fall in employment, export orders and capital spending. The organisation is now forecasting 170,000 job losses in engineering between now and the end of next year.

Mr Mackenzie said a cut in rates was needed "as a matter of urgency", but he cautioned that even if one came it would be too late to escape heavy job losses and cutbacks across the engineering sector.

The latest figures from Dun and Bradstreet showed that business failures are on the rise again after five years of virtually continuous decline. There was a sudden surge in the failure rate in the third quarter with the number of firms going bust rising by 18 per cent compared with the same period last year.

Most market pundits have factored in a quarter point reduction in rates, which would take them down to 7.25 per cent. But there are suggestions that the Bank is angry at attempts to "bounce" it into a rate cut, not least from the Chancellor, who has made it clear he wants to see a reduction.

Headline pay figures also released yesterday pointed to rates being kept on hold, however. The growth in average earnings in the year to June was revised upwards from 4.7 per cent to 5 per cent - well above the "tolerance threshold" of 4.5 per cent that the Bank deems necessary to keep to the inflation target.

"If rates are cut tomorrow it will be testament to the power of political persuasion and a blemish on the Bank's credibility," said Kevin Darlington, an economist at ABN Amro.

But the EEF's Mr Mackenzie said a decisive cut in rates was vital to send a psychological message as much as anything to the financial markets and manufacturing industry.

"A half point reduction would be a clear signal and, we hope, the start of a series of reductions that will bring our interest rates into line with those in Europe," he added.

Tim Melville-Ross, director general of the Institute of Directors, said the economy was slowing significantly and would slow further because of deteriorating global conditions, justifying a half point cut in rates.