CBI demands rate cut

Business leaders yesterday called for decisive action from the Bank of England as new evidence emerged of the worst slump in export prospects for two decades.

Digby Jones, director general of the Confederation of British Industry, demanded that the Bank cut rates by half a percentage point after the CBI's latest survey showed a "deeply worrying" collapse in every major economic indicator.

Orders, employment and investment intentions have all fallen, and the CBI said the survey painted the bleakest picture since July 1980.

"Business needs decisive and meaningful action to shore up confidence," Mr Jones said. "With the inflation outlook benign, there is ample scope for the Bank to lower rates and the economic situation justifies a half-point cut. Indeed, if the Bank was not to cut rates by half a point now it is difficult to think of a situation when it will."

The first comprehensive survey of industry since September 11 shows business confidence in the recession-hit manufacturing sector sliding to a three-year low, and job losses - which already totalled 125,000 in the year to August - accelerating.

Analysts said the sharp fall in optimism, to -54 from -22 in July, would intensify fears about the growth prospects for the British economy. "On the basis of the survey's past 20-year track record, this number looks to be consistent with annual growth of GDP of around -2%," said Daniel Kaye, of Capital Economics.

The CBI's demand for a rate cut will turn up the heat on the Bank of England's nine-member monetary policy committee when it meets on November 7. Borrowing costs in Britain are already at a 37-year low of 4.5% after six rate cuts this year, but dovish comments from MPC members Kate Barker and Christopher Allsopp earlier this week raised expectations of a further cut.

Evidence of what the CBI calls the "deflationary pressures" facing manufacturers will help the doves on the MPC argue that rates could come down again without stoking inflation. Firms reported that both domestic and export prices are already falling, and are expected to decline further in the coming months, putting the squeeze on manufacturers' margins.

Exporters have been particularly badly affected by the downturn since the September 11 attacks, with the outlook at its worst for 21 years. "The survey shows the main impact on the UK economy of the US tragedies is being borne by UK exporters," said Ian McCafferty, the CBI's chief economic adviser.

Firms citing developments abroad as a key constraint on business is at its highest level for 18 years, reflecting concerns about the effect on the global economy of president Bush's war on terrorism.

Hopes of further confidence-boosting measures from the Bank of England did not prevent sterling from falling on the foreign exchange markets after the gloomy picture painted by the CBI yesterday. The pound fell a quarter of a percent against the dollar to $1.42 after the survey was released, reversing gains in early trading, and half a percent against the euro, to trade around 62.7p.

"The market has given lots of weight to the CBI survey and there has been a negative impact on sterling," said Audrey Childe-Freeman, of CIBC World Markets. "The CBI data highlight not only that manufacturing is in trouble but that conditions continue to deteriorate."

Despite its pessimism about industry's predicament, the CBI expects Britain to escape full-blown recession in the coming months. "The imbalances in our two-speed economy are likely to worsen over the winter," said Mr McCafferty. "However, an overall recession is unlikely as the resilience of the consumer sector will continue to provide support."