BUSINESS has urged the Bank of England to keep interest rates on hold at 5% this week and be ready to cut them in the coming months to head off a recession.

After a week of bleak economic news, pressure on the Bank’s monetary policy committee (MPC), which meets this week, is intensifying. The outlook is more worrying than at any time in the Bank’s 11 years of independence.

“For the moment the Bank should keep rates on hold. The slowing economy and wage moderation should help to prevent inflation,” said Steve Radley, chief economist at the Engineering Employers’ Federation. “However, if the economic downturn continues to gather pace it must be ready and willing to cut rates once again.”

David Kern, economic adviser to the British Chambers of Commerce, agreed. “The MPC cannot disregard these worsening threats to growth,” he said. An interest-rate hike on Thursday — the European Central Bank increased rates last week to 4.25% — would be “devastating,” said Kern.

MPC members will have to weigh inflationary pressures — especially rising energy costs — against firm evidence of a sharp drop in consumer spending.

The slump is putting huge pressure on retailers. On Friday, John Lewis became the latest to report falling sales, down 8% at end June. Sales of big-ticket items — electricals and household goods — dropped sharply. Earlier in the week Marks & Spencer reported an unexpected drop in sales, sending its shares plummeting.

The FTSE General Retailers index — which tracks the share prices of quoted retail groups — has now fallen by 55% in the past year, and is at its lowest level since 1991.

Analysis for The Sunday Times by Company Watch, an independent research group, shows that 45% of quoted retailers are under financial pressure. Three years ago the proportion was only 27%.

Company Watch scores firms’ strength out of 100 by monitoring key financial ratios. If a company’s score falls below 25 it is judged to be in the “warning” zone. Of the 60 quoted retailers checked, 27 now have scores below 25.

“Any sector will have about one-quarter of companies under 25 at any one time. But this is a high proportion. Experience tells us that six or seven of these retailers will be in financial difficulties over the next few years,” said Company Watch’s Guenter Steinitz.

Car retailers, which have been particularly hard hit, are calling for the government to think again on vehicle-excise duty changes that penalise the owners of larger cars.

“Ministers have said they will reconsider the duty, but they should have just scrapped it. Saying they will think about it is ridiculous because it leaves it hanging over people’s heads and adds to consumer gloom,” said Trevor Finn, chief executive of Pendragon, the UK’s largest car retailer.

Estate agents are suffering from a fall in house sales, with many facing closure. Forecasts from Numis Securities suggest one in five high-street estate agencies will close this year.

The “shadow” MPC, which meets under the auspices of the Institute of Economic Affairs, calls for interest rates to be kept on hold this week, with eight of its members recommending no change and one, Patrick Minford, urging a quarter-point cut.

Despite the prospect of a further significant rise in inflation, six of the eight members had a “bias” to cut.

“The real economy looks seriously weak and the outlook for the housing market looks dire,” said Roger Bootle at Deloitte.

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