Business calls for new rate cut

Industry leaders are calling on the Bank of England to cut rates again this week, amid signs that service sector firms are increasingly worried about the economic downturn hitting business prospects.

Confidence among business and professional services firms has declined sharply, a CBI survey warns today.

"Clearly the economic slowdown facing the UK is now spreading beyond the internationally exposed sectors typi fied by UK manufacturing," said Digby Jones, the CBI's director general. "We are seeing weakness in consumer-related service sectors and an intensifying squeeze on business and professional services companies."

The monetary policy committee surprised the City by cutting interest rates to 5% in August, but the minutes from the meeting show some members, including the Bank's hawkish deputy governor Mervyn King, argued strongly against another cut which they feared could fuel the consumer boom.

The CBI's latest snapshot shows that a balance of minus 50% of services firms are more pessimistic about the outlook, well down on the minus 8% recorded in May and the gloomiest outcome since the survey began in 1998. The balance figure is reached by substracting the number of firms reporting they are less optimistic, from those reporting they are more optimistic.

"This survey shows a very sharp fall in confidence in the service sector which powerfully supports the view of those who say the UK econ omy is slowing sharply," said Roger Bootle, economic adviser to Deloitte and Touche. "The consumer may still be active but business is becoming alarmed about economic prospects. If the MPC needed evidence to cut rates further, this survey provides it."

Engineering representatives added their voice to the CBI's call. "With the outlook for the global economy and UK manufacturing clearly worsening, all the signs are pointing to the situation getting worse before it gets better," said Stephen Radley, chief economist at the Engineering Employers' Federation. "The Bank of England must cut interest rates again to prevent further damage to our manufacturing base and the rest of the economy."

But most City economists expect the Bank to disappoint industry and homeowners when it announces its decision on rates this Thursday. "It seems very unlikely that the MPC will follow its surprise August rate cut with another cut in September," said Michael Saunders at Salomon Smith Barney. While manufacturing was still weak, he said there were some hopeful signs in the latest CBI survey with fewer firms reporting stockpiles of unsold goods.

Some economists believe rates may have reached their lowest point. "Rates are as low as they are for two reasons - the strength of sterling and the weakness of the global economy," said Ross Walker at the Royal Bank of Scotland. "Sterling has fallen back over the past month so it might take another downward surprise to the world economy to get rates lower. Without this, or another relapse on the part of the euro, rates have probably bottomed."