Pressure mounts for rate cuts: Surveys point to decline in business and consumer confidence

PRESSURE on Kenneth Clarke to cut interest rates is likely to intensify this week with the publication of a survey by the Confederation of British Industry casting doubt on the strength and durability of economic recovery.

The survey is thought to suggest that business confidence is slackening. Manufacturers appear to be increasingly nervous about domestic demand, while long-standing fears about export markets level off. Recent surveys have pointed to a sharp fall in consumer confidence, as people grow worried about the tax rises planned for next year.

The picture is in line with Friday's gross domestic product figures for the third quarter of the year. They showed a fall in manufacturing output, with the growth in the economy being fuelled by the service and energy sectors.

The betting that Mr Clarke will cut interest rates at the time of the Budget - or possibly before - strengthened markedly in the financial markets last week. The three-month interbank interest rate - which tracks base rate expectations in the money market - ended the week at 5.5 per cent, fully discounting a half-point base rate cut. The short sterling futures contract is discounting nearly three-quarters of a point off base rates.

Ruth Lea, economist at Mitsubishi Bank, said the unexpectedly strong third-quarter GDP figures would not have given the Government much comfort and that they did not make a Budget-time cut in base rates any less likely. 'They will be anxious to ensure growth gathers momentum and will give it a hand with an interest rate cut,' she said.

The case for a rate cut has been strengthened by last week's cuts elsewhere in Europe, led by the half-point reductions in the Bundesbank's key rates on Thursday.