Employers step up pressure for rates cut

Two of the UK's largest employers' groups today racked up the pressure on the Bank of England to cut interest rates when it meets later this week.

The CBI and the Engineering Employers' Federation urged the Monetary Policy Committee to act now to prevent the manufacturing recession spreading.

Although virtually all economists in the City believe the MPC will keep rates on hold on Thursday, there are suggestions the Bank could repeat its surprise rate cut of four weeks ago.

Martin Temple, the EEF's director general, said the outlook for the global economy meant the situation was likely to get worse before it showed signs of improving.

"The Bank of England must cut interest rates again to prevent further damage to our manufacturing base and the rest of the economy," he said.

Meanwhile, Digby Jones, the CBI's director general, said the Bank's earlier decisions to cut rates had been vindicated by the state of the economy and the low level of inflation.

"Another cut is necessary to help insulate all sectors of UK business from the persisting global slowdown," he said. "The Bank should cut sooner rather than later."

His comments came as the CBI said its latest survey of the services sector showed profitability and optimism falling at the fastest rates since November 1998, when the world was in the grip of financial panic.

The crack in confidence was led by the business and professional services sector. The number of companies pessimistic about their outlook outnumbered the optimists by 50 per cent, compared with just 8 per cent in May.

Roger Bootle, economic adviser to accountants Deloitte & Touche who carried out the survey, said he expected rates to fall to 4.5 per cent from 5 per cent by the end of the year.

"The absence of inflationary risks, the weakness of industry and the threat of weaker consumer spending will force the MPC's hand – if not this month, then probably next," he said.

But other economists said the strength of the consumer economy – as evidenced by record consumer borrowing data last Thursday – would prevent the MPC cutting again.

Michael Saunders at Schroder Salomon Smith Barney, said: "We are loath to rule out a cut totally but the chances of another cut this month seem very low. Rates will probably not be cut in subsequent months either."

Geoffrey Dicks at Royal Bank of Scotland said if the MPC were still in "rate-cutting mode", the only issue was the timing.

Mr Dicks said the MPC's record showed it was 50 per cent more likely to change rates in one of the four months – February, May, August and November – when it publishes its inflation report. "The most likely timing of another cut would be November," he said.