CBI urges more rate cuts as confidence dips

The CBI will today urge the Bank of England to stand ready to make further cuts in interest rates in the coming months, as it warns that business confidence has fallen in 10 of Britain's 12 regions.

As the Bank of England's nine-member monetary policy committee prepares to meet later in the week to set interest rates, the CBI says its quarterly regional trends survey shows that businesses are still waiting to feel the benefits of a recovery in the global economy.

Only firms in the south-east and northern Ireland saw their prospects improve over the past three months, according to the survey, which predicts that a further 38,000 workers will be laid off in the next three months as businesses wait for orders to rebound.

"Firms across the UK are struggling to keep their heads above water, with severe job shedding predicted in almost every region and confidence low," says Doug Godden, the CBI's head of economic analysis. "Though interest rates may be at the appropriate level for the time being, the Bank of England should remain vigilant. Further rate reductions may yet prove necessary later in the year should the elusive global recovery fail to materialise."

Few analysts expect the MPC to make another cut in interest rates after last month's quarter percentage point reduction, which took borrowing costs to 3.5%. Steve Radley, chief economist of the Engineering Employers Federation, says a resurgence in global demand is now more important to manufacturers than lower borrowing costs.

"Just as the Bank was right to cut last month it is now right to wait and see how the economic picture develops in the autumn. For manufacturers, the bigger issue remains healthier markets and a moribund eurozone which continues to hold back prospects for a stronger recovery," he says.

Despite the downbeat tone of the CBI report, it did show that firms see some cause for hope. For the first time in 15 months, more than half of the regions expect export orders to rise, with the north-west and Wales expecting the strongest improvement. Over the last quarter, only the north-east and Northern Ireland saw export orders picking up.

A similar picture emerges today from the monthly business trends report from BDO Stoy Hayward, which warns that business confidence is still "brittle". Although its optimism index shows some evidence of a "Baghdad bounce", rising from 98.0 to 98.4, BDO still expects the Bank to be forced to make another confidence-boosting cut in interest rates by the end of the year.

The report says service sector firms are feeling most confident, as the recovery in the equity markets boosts sentiment in the City and lowers the cost of finance; but improvements in output have been "patchy" over the past month.

Chris Grove, partner at BDO Stoy Hayward, says firms are pinning their hopes on a gradual recovery.

"In the absence of a shock from the financial markets or a terrorist attack - both of which remain the main threats to business confidence - UK businesses should be able to look forward to modestly improving trading conditions and low funding costs," he says.