Rate cut urged as optimism slides

Business leaders pile pressure on the Bank to act before slower demand takes its toll on firms

Business groups have called on the Bank of England to cut interest rates this week to help stem a slide in business confidence on the back of slow domestic demand.

Though most economists expect the Bank's Monetary Policy Committee to wait until August before acting, business leaders are piling the pressure on the Bank, which starts its meeting on Wednesday under the leadership of the new Governor, Mervyn King.

Optimism among UK businesses slipped to its lowest level in more than four years, suggesting that companies are failing to benefit from an economic upturn in the aftermath of the Iraq war, a survey from BDO Stoy Hayward, the accountants, reveals today.

Its optimism index, an indicator of GDP growth two quarters ahead, dropped 0.2 points in June, implying annualised economic growth of just 0.2 per cent in the fourth quarter of 2003, the firm said.

This was despite the impact of a weaker pound in May and June, suggesting that post-war recovery has failed to take hold, the firm said.

Peter Hemington, a partner at BDO, said the situation was already bad before the war begun. "Low investment levels and slowing consumer spending were already having a serious impact before the conflict started. As a result, businesses are in no mood for spending," he warned.

Though interest rates are already at a 48-year low of 3.75 per cent, the Engineering Employers' Federation added its voice to calls for a cut.

The EEF's director general, Martin Temple, said: "With the world economy struggling to respond to treatment, especially the dire state of the eurozone, the Bank must provide a shot in the arm as insurance.

"So long as the current anaemic conditions persist elsewhere it is difficult to see how the UK economy alone can continue to sustain itself without a further boost."

BDO's findings were echoed in a call for the Bank to cut rates by Digby Jones, the head of the CBI. Mr Jones said: "Firms have been waiting for the -recovery for a long time, but the economy just seems to be bumping along the bottom. There is little sign of growth gathering momentum.

"While that is the situation and while there is little suggestion of price or wage inflation, business is going to grow increasingly impatient for a rate cut. The Bank should act now."

Data last week showed that the service sector, which accounts for two-thirds of Britain's economy, had expanded strongly in June.

Ross Walker, at RBS Financial Markets, said: "That reinforces our view that we probably won't get a cut in July. It will be a close decision. I just feel the majority will wait until the forecast round in August."

Adam Chester at HBOS Treasury Services said: "Given that things were relatively balanced going into this, the Bank will probably hold off now. That said, we are still looking for a cut in August."

Hopes of a rate cut had been buoyed at the start of the week by comments from Mr King suggesting that the pound's strength could hit already sluggish economic growth.