Businesses press for interest rate cut

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Business groups today called on the Bank of England to cut interest rates this week to stem a severe downturn in demand for the UK's core services sector.

But hopes of a cut are fading in the face of the sharp fall in the pound. Analysts said the best hope lay with a dramatic rate cut by the ECB.

Weakness among consumer services firms - such as hotels and restaurants - has intensified despite the Gulf war victory and a survey carried out by the Confederation of British Industry and accountants Grant Thornton that this sector has reported the fastest decline in business volumes for a year. The balance of minus 22 per cent matched the figure recorded in May 2002.

Scott Barnes, head of specialist financial services at Grant Thornton, said the plight of consumer services gave "cause for great concern". "The 'Baghdad bounce' simply hasn't materialised," he said. "The pound is likely to boost British exports but if a more widespread recovery is to be stimulated, a further reduction in rates may be necessary."

A separate survey from accountants BDO Stoy Hayward showed the consumer slowdown had affected services firms severely.

Its index of overall business activity fell to a level that implied annual economic growth of 1.3 per cent in the third quarter of 2003, it said.

Peter Hemington, a partner at BDO, said expectations were "extremely downbeat". "We hope to see the Bank take decisive action to boost the economy by cutting interest rates this week."

The Engineering Employers' Federation, which publishes its latest survey of firms tomorrow, added its voice to calls for a rate cut.

Dougie Peedle, deputy chief economist, said: "The position in the UK justifies a rate cut."

Most economists believe the Bank will leave rates on hold at 3.75 per cent. "There is no doubt the decision will be close but on balance we are looking for no change," said John Butler, UK economist at HSBC.

In contrast, a series of hints from senior ECB officials have boosted hopes the bank could cut its main rate by a half-point to 2.0 per cent on Thursday.