Bank 'must cut rates' to halt recession

The Governor of the Bank of England, Mervyn King, is under growing pressure to cut interest rates by a quarter, if not a half point, when the Monetary Policy Committee meets on Wednesday, to stave off a full-blown recession.

Worries about the UK were fuelled by the economic crisis in Iceland at the weekend. Icelandic companies, which own big chunks of the British high street, were in danger of collapse along with its biggest banks.

Related articles

• Europe shivers as credit freeze hits Iceland
• It missed the party ... but bought the guests instead: The rise and rise of Santander
• Search the news archive for more stories

Financial markets in the US and UK were expected to stay highly volatile this week, despites the US decision to pass the $700bn (£400bn) bail-out package. In a surprise move, the US decided to drop its ban on short-selling of financial stocks, which should help to restore confidence.

But experts remain nervous about the British outlook after the pound's fall to its lowest level against the dollar for 16 years on Friday. In another move to improve liquidity, the Bank of England will launch a £40bn auction of three-month loans on Tuesday to help banks.

New figures due this week from KPMG will show the sharpest drop in overall demand for new staff in more than a decade; that both permanent and temporary placements fell sharply; and that the five-year growth in permanent staff salaries ground to a halt. The jobless rate is now 5.5 per cent or 1.7 million people out-of-work, a level which is predicted to hit 2 million by the end of the year.

A KPMG spokesman said: "Like the housing market, employment figures have been moving steadily downwards. Losses have been in the public and private sectors – no prizes for guessing which industries."

The jobless numbers will compound the economic gloom, worsened last week by the release of September's figures showing the sharpest fall in service sector jobs. This has added to growing pressure for interest rate cuts.

A survey of 61 City economists showed that the median now predict a quarter point cut in interest rates – 42 forecast a quarter point reduction, four say it will be a half-point cut while 15 believe it will stay at 5 per cent.

The MPC's most contrarian member, David Blanchflower, who has consistently argued for big cuts in rates, is pushing for an even larger reduction to prevent the economy from seizing up. He was the only one of the nine-member MPC who voted for a cut last month and will continue to demand lower rates. Mr Blanchflower said on Friday: "My view is that the interest rate must come down and I will be telling that to the committee. But it's like betting on the races at Cheltenham."

The last time the Bank of England cut rates by a half-point was in November 2001. It also lowered rates in April, after the credit crunch bit.

Citigroup's European economist,Michael Saunders, said: "We've got a severe financial crisis that has worsened in the past week and clear signs the economy is falling off a cliff. The balance of risks has shifted decisively to the downside."

Earlier in the week the Bank warned that a large number of British companies were failing because of lack of credit.