More rate cuts to come

The Bank of England paved the way for more interest rate cuts yesterday to counter the looming global downturn, admitting it had been surprised by the speed of the slump.

In a gloomy assessment of prospects for the UK economy, the Bank warned that the slide in overseas markets would have a knock-on effect on British jobs and industry, which is already in recession.

"We can't wave a wand and magically insulate the UK from the world economy," said the Bank's deputy governor, Mervyn King.

The speed at which the downturn has spread from the US to Europe has alarmed the Bank's nine-strong monetary policy committee. It unexpectedly cut interest rates to 5% last week, and yesterday hinted that more could follow.

"The possibility that the slowdown in the international economy may be deeper or more prolonged remains a downside risk," it said in its quarterly inflation report.

Weaker growth abroad and at home is reducing price pressures in the economy, and the Bank now expects inflation to be below the government's 2.5% target for the next two years.

The extent of the downturn was revealed yesterday when the US computer giant Gateway admitted it would close its British factories, gas company BOC said it would sack 1,500 workers worldwide and 1,000 jobs were cut at the City bank Credit Suisse First Boston.

Industry leaders said the slowing world economy was now a greater threat to the UK economy than inflation. "The Bank should have the scope to cut interest rates further in the months ahead and should aggressively use every opportunity," said Ian Fletcher, chief economist at the British Chambers of Commerce.

Sudhir Junankar, of the Confederation of British Industry, said: "The report confirms the main risk to UK growth prospects is if the world slowdown proves to be deeper and more prolonged than expected."

Labour MPs responded to the Bank's report by pressing for further rate cuts to protect manufacturing. John McFall, chairman of the Commons Treasury select committee and MP for Dumbarton, on the industrial Clyde, backed last week's rate cut, but called for more debate before any further moves.

"We have two economies. The consumer boom goes on while manufacturing is in recession. It remains 20% of GDP and a very important 20%. Manufacturing is where the skills are and where the government's New Deal policies are leading - to new skills and new jobs in manufacturing."

Tory MPs warned that faltering economic growth could threaten Labour's plans for increasing public spending. Former Treasury adviser, David Ruffley MP, who also sits on the Commons committee, said: "The chancellor should be very worried about the outlook for GDP. Low growth will make his large spending figures look imprudent.

"He's been Lucky Gordon during his first term. With sick GDP figures this year it will be a different picture and the prospect of tax rises must be looming."

But Mr King said the government's forecast for tax revenues was based on cautious assumptions about economic growth and would not be threatened by the downturn. Although the Bank believes the economy will undershoot the Treasury's growth target this year of 2.25%- 2.5%, it believes the risks of an outright recession are small.

City analysts said the downbeat tone of the report was a clear hint that the Bank is standing by to cut rates again should the outlook for the economy darken.

"The strong message from the August inflation report is that the door is open to further falls in interest rates over the coming months," said Jonathan Loynes, chief UK economist at Capital Economics.