CBI pleads for rapid rate cut

Britain's leading employers' organisation, the CBI, yesterday demanded a cut in interest rates to rescue Britain's manufacturing sector. The call came after the organisation's latest snapshot of industry found weakness in global trading conditions was spreading to the domestic market.

The CBI said manufacturing orders were falling at their fastest rate in four years, with factory output, jobs and investment all being cut by firms that were seeing their profit margins eroded by higher costs and lower prices.

Urging the Bank of England's monetary policy committee to shave a quarter point off interest rates at its meeting next month, the organisation's director general, Digby Jones, said: "The end of the Iraq conflict will steady nerves. But the world's economic problems were there before the war and they are still there now.

"Manufacturers hoped that domestic demand would hold up until there was a pick-up in global trade, but that does not seem to be happening."

Mr Jones said the CBI was not forecasting a recession, but the problems of manufacturing were being compounded by a slowdown in other parts of the economy - particularly in consumer spending.

It was time, he said, for cheaper borrowing to see business through "this difficult patch".

With the CBI casting doubts on Gordon Brown's upbeat forecasts for growth next year, Mr Jones added: "The prospects for a sustained recovery appear a long way off and signs of inflation in the wider British business sector are rare."

Opposition politicians seized on the results of the quarterly industrial trends survey to attack the government's handling of the economy.

Michael Howard, the shadow chancellor, said the increase in national insurance contributions at the start of April was "the wrong tax at the wrong time", and could only make people working in manufacturing feel less secure.

A breakdown of the survey showed that order books fell far faster than expected last month, with only 16% of the more than 900 companies questioned reporting that demand had risen over the past four months while 37% said it had fallen.

Business confidence remained weak, although the CBI said this might have been affected by the war in Iraq, which was being fought at the time the survey was conducted.

The CBI said 70% of firms were working below full capacity, only a slight improvement on the 74% reported in January, which was the highest since the industrial slump of the early 80s. It estimated that 41,000 jobs were shed in the first quarter, with the loss of a further 45,000 in prospect for the second quarter.

Despite the gloominess of the survey, one of Britain's leading economic think-tanks warns homeowners to prepare themselves for higher interest rates by the end of the year. The National Institute of Economic and Social Research says today that if the Bank of England responds to the call from the CBI for lower rates, it will soon have to reverse the move as the economy picks up.

By the end of 2004, the institute expects rates to have risen to about 5%, from their current 48-year low of 3.75%.