Bank of England believes recession can be avoided despite rise in jobless

Slowdown: Unemployment starts to rise amid growing uncertainty over direction of the UK economy

The Bank of England put the chances of the UK entering recession at just one in 10 yesterday, despite news that unemployment rose during October for the first time in a year as the global slowdown impacted on the domestic economy.

National Statistics said the number of people out of work and claiming benefit rose by 4,300 last month, to 951,100. The figure has been on a downward trend since 1992, with the last rise seen in October 2000.

The Confederation of British Industry reiterated its call on the Bank of England to show no restraint in cutting interest rates further. "The labour market is now on the turn," said Digby Jones, the CBI's director-general. "This confirms our fears that the UK's fundamentally strong economy is being hit hard by the global slowdown. Nobody should underestimate the problems. Firms are bracing themselves for a cold economic winter, with more job losses to come particularly in manufacturing and tourism."

Base rates are at a 37-year low of 4 per cent, after the Bank's Monetary Policy Committee made a half-point cut last week.

Ian Fletcher, chief economist at the British Chambers of Commerce, said: "With more lay-offs hitting the headlines this month and the latest plane crash in New York adding to the airline industry's woes, we can expect that October's figures will not be a one-off. We urge the Bank to act decisively if further interest rate cuts become necessary."

The Trades Union Congress echoed the sentiments, while calling on the Government to introduce measures in its forthcoming pre-Budget statement to boost the manufacturing industry.

In its quarterly inflation report, released yesterday, the Bank said inflation was likely to fall below the Treasury-imposed target of 2.5 per cent next year and there was a risk that consumer demand, which has propped up the UK economy at a time when others have stalled, could tail off next year. Mounting job losses and a slowdown in house price inflation were likely to weigh on consumer confidence.

However, it warned inflation could surge in 2003 given the risk that a widening current account deficit might weaken sterling and boost the price of imports.

Mervyn King, the Bank's deputy governor, said: "The risk of recession is still small but there is enormous uncertainty."

He cautioned that the strength of the UK economy to date was largely attributable to cyclical factors and a rise in public spending. The imbalance of strong consumer demand and declining manufacturing output may yet unwind. "The risk is that at some point the adjustment ... will come and it will be quite large," he said.

In its report, the bank noted that various members of the Monetary Policy Committee, which sets rates, took differing views on the likelihood of the various risks crystallising "and thus on the overall balance of risks".

John Butler, an economist at HSBC, said the Bank now believed it was more likely the UK would see a strong recovery in 2003. "Overall, this implies that the [Bank] believes that rates have troughed at 4 per cent and would have to be disappointed massively on the global outlook or the UK consumer to motivate them cutting rates again," he said.