Fall in confidence prompts calls for quarter-point rate reduction

The Bank of England was last night urged to cut interest rates again when it meets later this week, amid increasing signs of economic slowdown and faltering business confidence.

A rash of surveys published today shows optimism among firms in decline, profitability being further eroded and fears increasing that the war in Iraq will worsen the UK's economic prospects.

Digby Jones, director general of the CBI, said a cut in rates was "increasingly necessary" as economic uncertainty grew and growth forecasts are trimmed back. "In the short-term, it is clear that the case for a rate cut is looking increasingly compelling. It is vital we avoid an even more serious economic decline."

Mr Jones said that while exporters were benefiting from a stronger euro, the world economy remained weak and consumer confidence was likely to slow further before there was any general pick-up in global trade.

His comments came as the accountants BDO Stoy Hayward said business confidence was deteriorating as the conflict in Iraq escalates. BDO said that its "optimism index", which indicates likely GDP growth six months ahead, had dropped this month. BDO called on the Monetary Policy Committee to cut rates by 0.25 per cent.

The firm said the fall in the index reflected concern about the impact of a longer-than-expected war in Iraq and the potential effect of tax-raising measures in this week's Budget.

Separately, the accountants Grant Thornton said that confidence among medium-sized firms had been hit by the Iraq conflict. More than half the company chiefs surveyed by the firm believed the war would affect their businesses. Regionally, the highest level of pessimism was voiced by companies in the North and in East Anglia.

Graeme Forbes of Grant Thornton said: "These results show that businesses across the UK appreciate the current uncertainty prevailing over economic activity and have modified their growth plans accordingly."

Meanwhile, new figures showed a further slide in the profitability of UK companies. According to the credit rating and information company Experian, average return on capital fell from 7.57 per cent in the 12 months to the end of June 2002 to 6.98 per cent in the 12 months ending in September 2002. This is the 14th consecutive month that UK corporate profitability has fallen – a longer downturn than in either of the last two recessions. Experian said that profitability peaked in early 1999, since when it has more than halved. "If anything the decline is gaining momentum," said Peter Brooker, who compiled the firm's latest Corporate Health Check. "The fall over the last four quarters is easily the steepest annual decline during the four years that profitability has been in decline."