PRESSURE is growing on the Bank of England to cut interest rates this week as gloom over the economy intensifies.

Two of Britain’s best-known economists, Patrick Minford and Tim Congdon, say the Bank’s monetary policy committee (MPC) needs to slash rates to get the banking system working and head off a sharp downturn.

Minford, a professor at the Cardiff Business School and former adviser to Margaret Thatcher and the Treasury, called for an urgent 0.75 percentage point cut. He said the bank was being “irresponsible” in not acting already to “stabilise a fast-deteriorating situation” brought about by the sharp rise in money-market interest rates since summer.

Three-month Libor (London interbank offered rate), at which banks lend to each other, hit nearly 6.6% last week. “I regard the Bank’s behaviour as highly irresponsible, as I regard its behaviour in August and September as irresponsible and neglectful of a century of monetary teaching,” he said. “It is time for some sense to prevail.”

Congdon, founder of Lombard Street Research and now at the London School of Economics, is normally a “hawk” on interest rates. But he called for a half-point cut this week. “The Bank of England and the Financial Services Authority plainly don’t know what has hit them,” he said. “Restoration of banking normality is essential.”

The pressure for a rate cut comes as UK retailers face a crucial test of the strength of consumer demand in the run-up to Christmas.

Senior retail executives say this weekend — the first in December and coming immediately after many have been paid — will indicate if their hopes of decent trading over the festive period are to be fulfilled. Many are already offering steep discounts in the face of sluggish trade.

Three of London’s busiest shopping streets — Oxford, Regent and Bond streets — staged a “Super Saturday” yesterday, banning vehicles in an effort to attract more customers.

In America, there was growing evidence this weekend of the depth of the credit crisis. It emerged that the US Treasury department has begun a campaign to persuade banks to freeze interest rates on sub-prime loans that are due for renegotiation. Treasury officials estimate that 2m homeowners have sub-prime mortgages with cheap rates that could jump by one-third when the initial “teaser” rate runs out. Some estimates predict that about 500,000 families could lose their homes.

There was further gloom, too, over the financial fall-out from the sub-prime crisis on Wall Street. Moody’s, the credit-rating agency, said it was reviewing its rating of $65 billion worth of debt held by Citi, one of the world’s largest banks.

Minford and Congdon are not alone in calling for a UK rate cut. Two other members of the “shadow” MPC, which meets under the auspices of the Institute of Economic Affairs, also say Bank rate needs to fall by half a point this week.

Both Peter Spencer, economics adviser to the Ernst & Young Item Club, and Peter Warburton of Economic Perspectives, warn of the risks from the credit crisis. Another, John Greenwood of Invesco, calls for a quarter-point reduction, making it a 5-4 vote on the shadow MPC for a cut.

Despite the pressure, most analysts do not expect the Bank to cut this week because of inflation worries. A survey by Ideaglobal.com, the financial-research company, puts a probability of just under 40% of a cut from the present 5.75% level on Thursday.

According to Reuters, only 15 out of 56 City economists expect a rate cut this week, though 53 think the Bank will act before the end of the first quarter of next year.

Many in business want the Bank to announce a reduction in interest rates this week in order to head off falling business and consumer confidence.

David Kern, economics adviser to the British Chambers of Commerce, said the Bank had to act pre-emptively. “World economic gloom is worsening,” he said. “A small UK rate cut in December would help sustain business and consumer confidence, and ensure we are not talking ourselves into an unnecessary recession.”

The Engineering Employers’ Federation will report tomorrow that industry is still enjoying good demand, but that members are concerned about the outlook as the economy slows into the new year.

Martin Temple, its director-general, said: “The warning lights for the economy are now flashing amber and the Bank must stand ready to take swift and decisive action to arrest the possibility of a serious slowdown.”

The biggest gloom is in the City, where the credit crisis has been felt directly and where there will be peak-to-trough job losses of 10,000, according to the Centre for Economics and Business Research. That would be smaller than the 35,000 jobs lost during the equity bear market from 2000 to 2003.

Last week Mervyn King, governor of the Bank of England, announced that the Bank will offer an exceptional £10 billion of extra funding to UK banking groups at its base rate of 5.75 per cent for five weeks

But some City firms see opportunities from the credit crunch.

Shore Capital, a quoted investment bank, is to raise its largest-ever fund to cash in on the turmoil. Confirmation of the £243m fund-raising could come this week.

Shore is understood have already signed up one investor, with Lehman Brothers, the American investment bank, having pledged $50m.

Analysts say Shore is likely to use the money to snap up financial assets on the cheap. “This is a good opportunity for bottom feeding,” one said.

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