U.K. Economy Entered a Recession in Third Quarter, Niesr Says

By Svenja O'Donnell

Oct. 8 (Bloomberg) -- The Bank of England should cut the benchmark interest rate by a half point tomorrow after the economy tumbled into a recession in the third quarter, the National Institute for Economic and Social Research said.

Gross domestic product shrank 0.2 percent in the three months through September, the first contraction for a calendar quarter since 1992, the London-based institute, whose clients include the central bank, said today. The International Monetary Fund expects the economy to contract next year, according to a draft of its revised forecasts obtained by Bloomberg News.

``In view of these figures and of the intensifying banking crisis we take the view that the Bank of England should cut the interest rate by half a percentage point at its next meeting,'' Martin Weale, Niesr's director, said in a statement.

Niesr joined lobby groups including the Confederation of British Industry in calling for the biggest interest-rate cut since the aftermath of the Sept. 11 terrorist attacks in 2001. The Bank of England and central banks around the world pumped more than $480 billion into markets yesterday to stem the global financial crisis.

The IMF expects the U.K. economy to contract 0.1 percent next year after forecasting growth of 1.6 percent six months ago, the Washington-based lender said in a report prepared for the Oct. 10 meeting of finance ministers and central bankers. Consumer confidence fell to its lowest level since at least 2004, a separate report by Nationwide Building Society showed.

Crisis Meeting

The Bank of England will cut its benchmark rate by at least a quarter point from the current 5 percent tomorrow, according to 49 economists of 61 economists in a Bloomberg News survey. Six predict a reduction of half a point, including Citigroup Inc. and JPMorgan Chase & Co. Policy makers have left the key interest rate unchanged since April.

Prime Minister Gordon Brown was scheduled to meet Bank of England Governor Mervyn King and Financial Services Authority Chairman Adair Turner late yesterday to discuss the crisis. Brown's government is looking at ``every aspect'' of the market turmoil, his spokesman said yesterday, refusing to rule out any measure to help the economy.

An index of consumer confidence dropped three points to 50, the lowest since the survey started four years ago, while the measure of sentiment about the current economic situation fell seven points to 39, Nationwide said.

A separate survey of job consultancies by KPMG and the Recruitment and Employment Confederation signaled that companies are hiring fewer workers. Demand for temporary staff fell to an 11-year low, the report showed.

``Rising unemployment, falling house prices and the continued turmoil in the financial markets are likely to mean that confidence will take some time to recover,'' Fionnuala Earley, Nationwide's chief economist, said in a statement.

Business confidence is also declining. The British Chambers of Commerce said yesterday that confidence among the 5,100 companies in its quarterly survey plunged to the lowest rate since the data began in 1989. Britain is in a ``worsening recession,'' the report said.

To contact the reporter on this story: Svenja O'Donnell in London at sodonnell@bloomberg.net.