The markets expect base rates to drop by a further 1.5 points to 6.5 per cent by the end of the year, although the Chancellor is understood to be under pressure from senior officials to consider even more dramatic reductions.
Pressure for rate cuts increased as the Treasury published a survey showing growing gloom about the economy among City and academic forecasters.
City economists also declared themselves unimpressed by Mr Lamont's Mansion House speech on Thursday. They complained that he had announced no new ideas to boost recovery and had done little to salvage the credibility of the Government's overall strategy. 'The speech was long on rhetoric, but short on substance and measures,' Keith Skeoch, economist at James Capel, said.
Simon Briscoe, of Midland Montagu, said the lack of substance in the speech would focus more attention on the Autumn Statement on 12 November, in which the Chancellor could not afford to disappoint expectations again. The Chancellor said in the speech that the Government would try to protect investment projects in allocating its pounds 244.5bn spending total for 1993/4. Measures would be included in the Autumn Statement to promote private sector involvement in public infrastructure projects.
But City economists were doubtful whether the boost to public investment would offer much scope to stimulate recovery. 'We are starting from a very low base,' Mr Skeoch said.
The Treasury's latest survey of economic forecasts by 22 independent analysts showed that predictions of a recovery next year are being cut back. The survey, which is the last before the Treasury's own predictions are published in the Autumn Statement, has the average forecast for growth in 1993 falling to 1.4 per cent from 1.8 per cent in the previous month.
The Chancellor announced on Thursday that he would set up an independent panel of forecasters from the City and academia. But City economists dismissed it as window-dressing. 'It sounds more like a way of sharing blame for the error, rather than getting the answers right,' one said.
The October survey of independent forecasters shows that, on average, unemployment is expected to rise by 200,000 from 1992 levels to 3.08 million by 1993, a 100,000 increase on last month's expectations. The Budget deficit is also expected to widen to pounds 39.4bn next year, a jump of pounds 1.5bn on forecasts drawn up in September.
Separately, hopes that the US recovery was finally under way suffered a setback yesterday, when the respected Chicago Purchasing Managers index fell 10 points to 49.7 per cent. The managers' report said the decline 'signals an abrupt end to seven months of across-the-board expansion'.
Britain is likely to pay in the long run for the pound's exit from the exchange rate mechanism by having to raise interest rates, Sir Leon Brittan, the EC competition commissioner, said in Glasgow yesterday.
He said a floating pound would mean uncertainty and investors would demand a premium for holding sterling in the form of higher interest rates.Reuse content