Grudging welcome to interest rate cut

Business leaders gave a grudging welcome to yesterday's cut in interest rates and warned that hopes of further reductions depended on the contents of next month's Budget.

Business leaders gave a grudging welcome to yesterday's cut in interest rates and warned that hopes of further reductions depended on the contents of next month's Budget.

The Bank of England ordered a quarter-point cut to take the base rate to 5.75 per cent. The move, widely expected, caused hardly a ripple on the London stock market. The Bank gave no reason for the cut, but analysts believe persistent low inflation has allowed it to cut rates as insurance against the slowdown in America hitting the UK.

Most mortgage lenders quickly followed, trimming the cost of a typical £60,000 repayment loan by about £10 a month. The Halifax cut its standard rate from 7.74 to 7.5 per cent; HSBC reduced its rate from 6.75 to 6.5 per cent.

The British Chambers of Commerce said the cut had been "a long time coming". The Trades Union Congress said it was the "first faltering step towards stabilising the economy".

Ian Fletcher, the BCC's chief economist, said firms wanted to see more rate cuts but warned there was a danger a pre-election Budget handout could trigger inflationary pressures. "With business looking for further cuts over the coming months, the Chancellor should be cautious of even the most modest tax cuts and spending increases."

The Confederation of British Industry welcomed the move and urged the Chancellor to deliver a "cautious" Budget. Kate Barker, chief economist, said: "Scope for further cuts will depend critically on whether or not tighter labour market conditions start to push up wages and on a cautious Budget package." The Engineering Employers' Federation urged the Chancellor not to "muddy the waters" by stoking consumer spending with unnecessary tax cuts.

City economists said the markets were now anxiously awaiting the Bank's quarterly Inflation Report, published next Wednesday. This includes the Bank's forecast for inflation over the next two years and will offer a firm clue as to whether more rate cuts are on the way.

Michael Hume, at Lehman Brothers, said he expected the report to show inflation rising above the Government's 2.5 per cent target. "Only if there is a marked deterioration in international or domestic conditions is a rate cut likely in the next month or two," he said. Nick Stamenkovic, of Nomura International, which expects rates to fall to 5.25 per cent this year, said the forecast would have shown inflation undershooting the target in two years' time if the Bank had not cut rates. "They don't need to cut rates as rapidly as the US because the domestic situation is far more robust," he said. "But history shows we are very vulnerable to a US downturn."

Recent figures have shown a mixed picture for the economy. GDP growth slowed sharply at the end of last year but the services and manufacturing sectors are enjoying robust growth. The pound fell almost two cents against the dollar to a two-month low of $1.4420, despite speculation that the US, which has already wiped a percentage point off rates, is poised to cut again. Sterling was dragged down by the euro, which fell sharply against the dollar. Traders shrugged aside figures showing that Germany's industrial output rose much faster than expected.

Analysts said the data showed there was little reason for the European Central Bank to cut rates. "The problem with the euro is that it doesn't react to good news out of the eurozone or bad news out of the US," said a trader. A warning by the ECB about risks of rising inflation further dented hopes of a cut in European rates, now 4.75 per cent. In its monthly bulletin, the ECB said: "There are still factors posing upside risks which require continued attention."