EXPERTS say the Bank of England will cut interest rates this week and that the Bank’s monetary policy committee (MPC) should be ready for further rate reductions to head off a sharp economic slowdown.

The “shadow” MPC, which meets under the auspices of the Institute of Economic Affairs, has been a good predictor of recent official interest-rate changes. It votes 6-3 this month for a cut in rates.

One of its members, Patrick Minford, said the Bank should cut by half a point in response to the rise in money market interest rates. Five others urge a quarter-point reduction to 5%, the third reduction in the present cycle. The Bank last cut rates in February, having previously reduced them in December.

Though recent economic evidence has been reasonably robust and inflation expectations remain elevated, shadow MPC members said the Bank needed to act to offset what appeared to be a worsening credit crisis.

“As in the US, the weakness of household and financial sector balance sheets combined with severe credit tightening could lead to an abrupt weakening of economic activity and inflation later in the year,” said John Greenwood, one of those urging a quarter-point cut.

The British Chambers of Commerce (BCC), which this week will publish its quarterly survey of business trends, is expected to reveal that activity has weakened in both services and manufacturing over the past three months.

However, the survey, of around 4,400 firms, a third of them in manufacturing, is also expected to show a rise in price expectations. Members of the MPC have made clear they will balance inflation risks against the need to cut rates to offset the effects of the credit crunch.

The survey is also set to show that business confidence has taken a battering as a result of continued problems in financial markets and worries about obtaining finance.

Separate from the survey, David Kern, the BCC’s economic adviser, called on the Bank to consider rate cuts both this month and next.

“In the face of evidence that the credit crisis is becoming increasingly dangerous, the MPC is now expected to cut interest rates to 5% on Thursday,” he said. “This move is urgently needed and long overdue, but it is no longer sufficient. We urge the MPC to consider a further cut in rates in May, to 4.75%.”

A former member of the Bank’s MPC warned this weekend that it was in danger of falling “behind the curve”. Sushil Wadhwani, an MPC member from 1999 to 2002, said: “The response of the US Federal Reserve since August 2007 has been commendable.

By contrast, the Bank of England reaction has been rather disappointing. It would appear that the Bank has decided to move gradually. This is risky and may well lead to some downside growth risks to the outlook for the UK economy.”

Though the City expects a rate cut this week, analysts warned that it was not a done deal. A survey by Ideaglobal.com, the financial research company, put a 60% probability on a cut on Thursday.

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