CBI calls for immediate interest cut as business confidence takes a dive

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The Independent Online

Britain's leading employers' organisation yesterday called on the Bank of England to send out a clear signal next week that interest rates had peaked. The Confederation of British Industry said a rate cut should come "sooner rather than later", as its latest survey found business confidence plunging to its lowest level since the end of the 1998 global financial crisis.

Britain's leading employers' organisation yesterday called on the Bank of England to send out a clear signal next week that interest rates had peaked. The Confederation of British Industry said a rate cut should come "sooner rather than later", as its latest survey found business confidence plunging to its lowest level since the end of the 1998 global financial crisis.

Business confidence and export prospects fell at their sharpest rate since January 1999 while orders for both UK and overseas buyers tumbled at their sharpest rate for a year.

Nick Reilly, head of car giant Vauxhall and chair of the CBI's economic affairs committee, said: "Manufacturing is faltering and risks slipping back into a downturn. We urge the Monetary Policy Committee to leave rates on hold next week and give a signal that the next movement will be down. If the trends indicated by this survey continue to weaken, a quarter point cut would be the right medicine sooner rather than later."

Mr Reilly said the CBI had only held back from calling for a rate cut - its first since June 1999 - because of worries over inflationary pressure in other parts of the economy. These included a tight labour market, fear of a sudden fall in the value of the pound and the huge injection of public spending announced last week.

"As far as manufacturing alone is concerned we would recommend a cut today," Mr Reilly said. "As to the wider economy, we are uncertain as to whether consumer spending will slow fast enough given the large rises in public spending."

His comments came as Ian Plenderleith, a member of the MPC, said a sudden fall in the pound, which has so far restrained inflation, could cause overheating unless consumer demand slowed sharply.

The CBI's survey showed that shortages of skilled workers were at their most acute for three years, especially for aerospace and motor vehicle producers. Meanwhile, industry's unit costs failed to fall for the first time in two years, mainly due to rising oil prices. As a result, the CBI said manufacturers' profit margins were squeezed as the prices they could charge fell, continuing a four-year pattern.

Mr Reilly said a fear of falling rates of return on capital investments was acting as a deterrent to invest - investment intentions are at their most negative for 15 months. "This is a worrying signal that companies remain very concerned about their profitability," he said. "This is a major cause for concern as it will lead to a shrinking manufacturing supply base and the ability of industry to meet demand without inflationary pressures would be undermined."

The CBI survey is the latest to paint a gloomy picture of the manufacturing sector. The Institute of Directors, British Chambers of Commerce and Dun & Bradstreet have reported sharp falls in business optimism. On Monday, the Office for National Statistics said manufacturers' rates of return had fallen to a six-year low.

However, the CBI may be accused of crying wolf. Although it accurately predicted the recessions of 1979 and 1990, it forecast a severe slump in 1998 that never materialised. Economist Stewart Robertson, of Lombard Street Research, said: "Unfortunately, surveys have become a means of lobbying, rather than a useful guide to conditions in manufacturing."

In his speech to the Aberdeen chamber of commerce, Mr Plenderleith, the Bank's executive director, acknowledged that manufacturers had been hit "most severely" by the strong pound. But he said the MPC had to be vigilant in case of a sudden fall in the pound. "The boost that could bring to external demand could be accommodated, without strain on the supply capacity of the economy as a whole, if domestic demand has moderated," he said.

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