CBI joins calls for interest rate cut

The Bank of England should cut interest rates next week to prevent a collapse in domestic confidence and spending, two leading organisations said yesterday. The CBI said the global downturn that had pushed UK exporters into recession had spilled into the home market.

Meanwhile, the head of the National Institute for Economic and Social Research, the independent think-tank, said a cut would be a "sensible precaution" against the downside risks to the economy materialising.

The calls will add to growing pressure on the Bank to cut rates to a 48-year low of 3.5 per cent on 8 May. But analysts believe the decision will be a tight call, as some on the Bank's Monetary Policy Committee are worried about the inflationary impact of the falling pound.

The CBI said manufacturers' orders from UK firms had fallen to their lowest levels for four years. Its quarterly survey of manufacturers also showed confidence among manufacturers had fallen for the third quarter in a row. Digby Jones, the CBI's director-general, said: "The time has come for another cut in interest rates to see us through this difficult patch. The prospects for a sustained recovery appear a long way off and signs of inflation in the wider UK business sector are rare."

The impact of the survey was slightly weakened by the fact that the research took place in the three weeks leading up to the collapse of Saddam Hussein's regime in Iraq.

But Mr Jones said: "The end of the Iraqi conflict will steady nerves, but the world's economic problems were there before the war and are still there now."

This was echoed by Begbies Traynor, a leading insolvency practice, which said the end of military action would not be enough to save thousands of firms from hitting the wall.

It said the retail, business services, printing, travel and construction sectors were worst hit, with sales falling as much as 35 per cent.

Nick Hood, its senior London partner, said: "We've been stunned by the huge surge in companies approaching us for turnaround support or seeking help with insolvency.

"If I were to stick my neck out, I think 2003 will be one of the worst years for small and medium-sized firms since the last recession."

The CBI said the decision to call for a cut had received unanimous support on its economic affairs committee, which includes executives from retailing and financial services.

Martin Weale, the director of the National Institute, said he backed a rate cut but said it would need to be reversed quickly as the economy enjoyed a rapid rebound. "I am still concerned about the downside risk," he said. "I assume there will be a cut next month which we expect to be reversed later this year and continue climbing into next year towards 5 per cent."