Bank of England Should Cut Rate to 4.5%, CBI Says

By Brian Swint and Craig Stirling

Sept. 15 (Bloomberg) -- The Confederation of British Industry, the nation's top business lobby, said the central bank should slash its benchmark interest rate in November by the most in seven years to halt a recession.

``Our members are having a tough time,'' Richard Lambert, director of the CBI, told reporters in London. ``There's scope for a half-point cut in November,'' assuming the inflation outlook doesn't change. ``We are now almost certainly in a mild recessionary phase.''

The Bank of England has kept its main rate at 5 percent since April on concern that the fastest inflation in at least a decade will become embedded in the economy. The European Commission says the U.K. has already entered its first recession since 1991 after growth ground to a halt in the second quarter, ending the longest stretch of uninterrupted expansion in a century.

Lehman Brothers Holdings Inc. plans to file for bankruptcy protection and Merrill Lynch & Co. agreed to sell itself this weekend, adding to the risk of further deterioration in Britain's financial services industry after the yearlong credit squeeze. The Bank of England pledged today to ``take appropriate actions if necessary'' to stabilize money markets.

The central bank, which hasn't cut its key rate by more than a quarter point since the aftermath of the September 2001 terrorist attacks, should reduce its benchmark to 4.5 percent this year and to 4 percent in early 2009, the CBI said.

Recession Forecast

The economy will contract 0.2 percent in the third quarter and 0.1 percent in the final three months of the year, the CBI said. The lobby cut its full-year projection to 1.1 percent from a forecast of 1.7 percent in June. Growth will slump to 0.3 percent next year, the new forecasts show.

The flagging economy is hurting Prime Minister Gordon Brown's popularity. The ruling Labour Party has the weakest support in at least a decade and has ousted two officers in the past three days who have called for a leadership challenge against Brown.

The economic slowdown may cool inflation and make it easier for the Bank of England to help the economy, Lambert said. Inflation will reach 5 percent this year before slowing to 2.3 percent by the fourth quarter of 2009, the CBI's forecasts show.

``We hope and believe that this will give the Bank of England scope to cut interest rates,'' said Lambert, who sat on the central bank's Monetary Policy Committee between 2003 and 2006. ``There is a significant risk that in 2010 inflation will actually be undershooting the 2 percent target by quite a way.''

Inflation Concern

Figures tomorrow will probably force Bank of England Governor Mervyn King to write a letter to Chancellor of the Exchequer Alistair Darling.

Inflation accelerated to 4.6 percent in August from 4.4 percent in the previous month, according to the median of 28 forecasts in a Bloomberg News survey of economists. That would be the fastest pace in at least 11 years. The central bank's mandate requires the governor to write a letter to the chancellor when the rate strays more than 1 percentage point from the target.

King will also release the bank's proposals for changing its money-market operations this week and invite comments from financial institutions and investors. The central bank will introduce a new facility to replace the Special Liquidity Scheme, an emergency lending program for banks which expires in October.

To contact the reporters on this story: Brian Swint in London at bswint@bloomberg.net; Craig Stirling in London at cstirling1@bloomberg.net.