Bank urged to bolster confidence with rate cut

The Bank of England was today urged to cut interest rates to their lowest level for almost half a century this week in order to bolster investor confidence.

BDO Stoy Hayward, the business advisers, said growth would fail to meet the Government's target next year unless the Bank cut rates by a quarter-point.

Peter Hemington, a partner of the firm, said BDO has considered calling for a half-point cut but ruled that out for fear of "freaking" the financial markets.

Mr Hemington said the Bank faced a difficult decision but added: "On balance we think the right thing to do is to cut rates by a quarter point. This is because confidence needs to be encouraged to ensure steady growth in 2003."

The Bank of England's Monetary Policy Committee starts its two-day rate meeting on Wednesday. A cut in interest rates to 3.75 per cent on Thursday would take borrowing costs to their lowest level since 1955.

The call is not supported by business organisations, such as the CBI and British Chambers of Commerce, which believe an unexpected rate cut would trigger fresh slumps on the markets as investors took fright. However, Mr Hemington said: "I don't think a quarter-point cut will freak people out. People are talking about a cut in September so why not bring it forward a month and be proactive and 'do a Greenspan'."

His comments came as BDO published its quarterly survey showing business optimism falling but the economic fundamentals looking sound. It said growth would return to respectable levels later this year while inflation would hit the Government's target within 12 months – something that may be seen as a trigger for a rate hike.

But Mr Hemington said he expected the impact of the recent slump on the financial markets to show up in the official data in 2003.

"We have had a couple of good quarters and businesses have felt good enough to build up their stocks, make investment plans and recruit people," he said. "Now the markets have gone bananas and companies may be thinking that maybe this was not a good time to make that investment or take on those people."

Economists in the City are unanimous the MPC will keep rates on hold although in August last year the Bank took the markets by surprise by cutting rates.

"We do not expect a repeat performance this week," said Jonathan Loynes, chief UK economist at Capital Economics. "But rate cuts are not out of the question if stock market weakness continues."

The plunge in share prices, which have lost 25 per cent this year, has forced many analysts to abandon their long-standing forecast of an August rate hike. Inflation is at a record low of 1.5 per cent compared with a target of 2.5 per cent, retail sales have suffered their first monthly back-to-back fall for four years and mortgage demand is weakening.