Calls for rate cuts intensifies

Business in London are urging the Bank of England to cut interest rates when it meets on Thursday to make borrowing cheaper and boost economic growth.

The London Chamber of Commerce (LCC) has established over half of businesses expect trade to slow this year, up from 9% a year ago and 25% on 31 December.

Companies, particularly in London, are facing a sharp slowdown as a result of the credit squeeze.

Since December, the Bank of England’s Monetary Policy Committee has cut rates from 5.75%. However, it is reluctant to move as far as many would like because of concerns over rising inflation.

Dr Helen Hill of the LCC said the credit squeeze is genuinely worrying for businesses at the current time. Reduction in availability of corporate credit will have serious implications, particularly for many of the capital’s smaller businesses whose confidence in their own immediate prospects has already been dented.

The MPC must react positively to these concerns with a reduction in interest rates this week, said Dr Hill.

In his Budget last month, Chancellor Alistair Darling predicted that the economy will expand by between 1.75% and 2.25% this year, well above the 1.6% expected by independent economists in the City.

However, Mr Darling was accused of being too optimistic by the Treasury Select Committee of MPs.

John McFall, Committee chairman said the Treasury’s forecast of economic growth in the next 2 years is more optimistic than the consensus view. There are significant downside risks to the economy and therefore potentially to tax receipts.

Some of the very things that have kept our economy growing over the last decade may start to cause us problems, and the 2008 Budget may not have recognised this fully. The credit squeeze which followed the collapse of the sub-prime mortgage market in the US has prompted banks and building societies to reduce mortgage lending, added Mr McFall.

Libor, the cost of lending between banks, hit 6.01% last week, its highest of the year and well above base rates of 5.25% set by the Bank of England. The Bank is under pressure to cut rates to 5% when it meets on Thursday.

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