Bank of England poised to cut interest rates as economic downturn continues

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The Independent Online

A slump in economic growth has primed the Bank of England to cut interest rates this week for the first time in two years. Policymakers are poised to vote through a quarter-point cut, trimming the base rate to 4.5 per cent, in an attempt to revive the flagging consumer sector and kick-start manufacturing.

For the first time the EEF, the manufacturers' organisation, has swung behind calls for a rate cut in the face of mounting evidence that business confidence has dived after a sharp slowdown in growth.

Martin Temple, the EEF's director general, said: "We believe [the Bank] should move now to shore up business and consumer confidence at a time of growing uncertainty."

All but four of 47 economists polled by Reuters believe the Monetary Policy Committee (MPC) will cut the cost of borrowing at its 100th meeting this Thursday. Only the intervention of the Bank's governor, Mervyn King, who used his casting vote to break the four-four deadlock, kept interest rates at 4.75 per cent last month, hours after the London bomb attacks on 7 July.

Since then, London has faced a second wave of bomb attacks and official data has shown that economic growth slowed to its weakest level in 12 years - below the level forecast by the Bank in its May inflation report.

The 0.4 per cent rise in the second quarter was the fourth quarter of below-trend GDP growth after recent revisions, which showed the slowdown set in half-way through last year.

Howard Archer, the chief UK economist at Global Insight, said a cut in interest rates "seems a nailed-on certainty", adding: "The growth outlook is currently even more uncertain, given that it is still unclear how much dampening impact the London bombings will have on overall growth.

"We expect the damage to growth to be temporary and limited, but the risks of a more pronounced and lasting impact would increase if further terrorist outrages occur over the coming weeks and months, especially if they are not contained to London."

A survey of business trends by the accountants BDO Stoy Hayward shows the sharpest fall in its output index for more than four years, implying annualised GDP growth of 2.2 per cent in the final quarter of 2005. This contrasts with the Chancellor's belief that the UK economy will grow at between 3 and 3.5 per cent this year. Peter Hemington, a partner at BDO, said the survey found that inflation fears had eased after the recent ballooning of the inflation rate to 2 per cent, its highest in seven years.

He said: "The fall in inflationary expectations is a helpful boost to an economy that has been struggling with reduced consumer demand." He believesthis would pave the way for the MPC to follow this week's cut with another.

The financial markets have priced in two rate cuts by the end of the year. Economists believe signs that the labour market is turning down coupled with a drag on growth from oil prices have overshadowed June's surprisingly strong retail sales data. Douglas McWilliams, the chief executive of the Centre for Economics and Business Research, a think-tank, said: "A quarter-point cut in August could be followed by another in September, if confidence has not recovered by then."

Research by KPMG shows that the number of UK businesses that issued profits warnings surged in the second quarter. The retail sector was among the worst offenders, with an 18 per cent jump in the number of warnings, to 98 in the three months to the end of June, compared with the previous quarter. Wm Morrison, the supermarket group, French Connection, the fashion retailer, and Boots, the chemists, have all warned on profits since March. Warnings from the engineering and transport sectors have also risen.

Many UK banks are expected to follow Lloyds TSB's lead and admit that consumers are struggling to repay unsecured loans and credit card bills.

Lloyds TSB has increased its provision to cover bad loans and HSBC is also expected to reiterate that sentiment today.

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