Business urges Bank to make big rate cut

Unions and business organisations have urged the Bank of England to slash interest rates by "at least" 1 percentage point this week to avoid a deep and painful recession.

The TUC and the British Retail Consortium have also ratcheted up the pressure on the UK's retail banks to swiftly pass on any interest rate cuts to hard-pressed mortgage holders.

Yesterday, the TUC urged the Bank of England's Monetary Policy Committee to slash interest rates by "at least" 1.5 to 3 percentage points on Thursday. A TUC spokesman said: "The main threat to the economy is now recessionary expectations and not inflationary expectations."

Most economists expect the Bank of England's Monetary Policy Committee to cut rates by 0.5 percentage points on Thursday, although the Government's recent data which showed a 0.5 per cent slump in national income in the third quarter may lead them to take more dramatic action. The European Central Bank also unveils its interest rate decision on the same day.

IHS Global Insight said it expects the MPC and the ECB European Central Bank to both cut rates by 50 basis points this week, but said there is a "compelling case for bolder Bank of England action".

This weekend, Steve Radley, the Engineering Employers' Federation's chief economist, called for a 1 per cent cut. He reportedly said: "The Bank is now behind the curve in cutting interest rates and these unusual times call for unconventional measures. A full-point cut in the base rate is needed to prevent the downturn from gathering pace."

The TUC has urged the Government to force high street banks, particularly those which they have partially nationalised recently such as Royal Bank of Scotland and HBOS, to pass on any rate cuts to mortgage holders. A TUC spokesman said: "If these [interest rate] cuts are to kick-start the economy, the Government must also use its new powers of ownership over banks to make sure these cuts are passed on to home owners."

He added: "The outlook for the economy is very gloomy. Unemployment is likely to rise to 2 million or more and jobs losses are going to occur across the economy and across the country." Yesterday, the accountancy firm Deloitte forecast that 2.9 million Britons would be out of work by the end of 2010, sharply up from the current level of 1.2 million.

Yesterday, the British Retail Consortium (BRC) – which has called for "at least" a half-point cut on Thursday to provide a pre-Christmas boost to beleaguered retailers – said a reduction will have little impact unless banks pass on the cut to consumers.

Stephen Robertson, the director general of the BRC, said: "At least as important as the size of the cut is that it should be passed on to customers through lower housing costs because clearly cutting rates alone is not enough if it does not filter through to consumers' individual finances." Retailers are heading towards one of their toughest Christmas trading periods for 30 years, as consumers batten down the hatches for the almost inevitable recession.

Today, MPs will grill the Chancellor, Alistair Darling, the Governor of the Bank of England, Mervyn King, and Lord Turner of Ecchinswell, the chairman of the Financial Services Authority, over the fragile state of the economy at the Treasury Select Committee. Mr Darling is expected to face tough questioning on certain areas, including how much the Government knew about the Icelandic banking crisis, and his plans to ramp up borrowing and spending to boost the economy.

Last week, David Blanchflower, an external member of its rate-setting Monetary Policy Committee, slammed the Bank of England for being too slow to cut rates. "Monetary policy has not been sufficiently forward looking," he said.