U.K. Needs Rate Cut to 4.5% After `Alarming' Quarter, BCC Says

By Jennifer Ryan
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Oct. 7 (Bloomberg) -- The Bank of England should cut the key interest rate by a half point to 4.5 percent this week after U.K. business confidence had an ``alarming'' drop in the past quarter, the British Chambers of Commerce said.

Business confidence, based on a survey of almost 5,100 companies, fell to the lowest since the data began in 1989, the London-based lobby group said today. Indexes measuring sales in services and manufacturing, making up 90 percent of the economy, showed contraction at a faster pace than in the second quarter.

The BCC and the Confederation of British Industry, the nation's two largest business lobbies, have both now called on the central bank to make the biggest cut in borrowing costs since 2001. Policy makers have left the key interest rate at 5 percent since April as they tried to bring inflation back down from the fastest pace in at least a decade.


``From the point of view of the authorities, this is potentially an emergency,'' David Kern, economic adviser to the BCC, told reporters yesterday. ``In normal times you don't ask the Bank of England to cut rates when inflation is so high. But the risks of recession are bigger and more immediate.''

The BCC's index for factory sales fell to minus 13 in the third quarter from minus 3 in the three months through June, the worst since 1999. A measure of sales at service businesses declined to minus 7 from minus 2 points, the lowest reading since 1991. Confidence for sales at service companies fell to 8 from 24, and for manufacturers it declined to 5 from 22, the report showed.

Factory Production

A separate report today may show that factory production fell for a sixth month in August. The Office for National Statistics will publish data on industrial production at 9:30 a.m. in London.

The bank will cut its benchmark rate by at least quarter point on Oct. 9, according to 48 of 61 economists in a Bloomberg News survey. Five predict a reduction of half a point, including Citigroup Inc. and JPMorgan Chase & Co.

``In the light of the current turmoil in the markets, the damage to confidence and implications for the real economy,'' the bank should make a half-point rate cut, CBI Deputy Director General John Cridland said yesterday.

Rate cuts still won't ease strains in money markets that are feeding the global financial crisis, said Kenneth Clarke, a former chancellor of the exchequer.

``Some modest cutting of rates may be justified but I don't think it will make great deal of difference,'' he said in an interview on Bloomberg Television yesterday. ``The Bank of England rate isn't having much effect on the real rate in the market.''

To contact the reporter on this story: Jennifer Ryan in London at Jryan13@bloomberg.net