BUSINESS LEADERS say the Bank of England must slash interest rates this week to head off a deep recession.

They say the Bank’s monetary policy committee (MPC) should cut by as much as a full percentage point, something it has not done since being granted independence in 1997.

Steve Radley, the Engineering Employers’ Federation’s chief economist, said: “With the economy in the first throes of a recession, there is a danger that business conditions could deteriorate even more rapidly.

“The Bank is now behind the curve in cutting interest rates and these unusual times call for unconventional measures. A full-point cut in the base rate is needed to prevent the downturn from gathering pace.”

Such a cut would push Bank rate to 3.5%, equal to its lowest level since 1955.

He is backed by David Smith, chief executive of Jaguar/Land Rover, who also urged the MPC to cut rates by a full point.

“Stimulating demand is crucial to avoid a deep and long recession, and interest rates are the place to start,” he said.

Other business bodies also demand a significant cut.

“In the face of growing risks that the UK recession is worsening, we believe the MPC must cut rates to 4% on Thursday,” said David Kern, economic adviser to the British Chambers of Commerce. “We also urge the MPC to make a further half-point cut before Christmas.”

Richard Lambert, the director-general of the CBI, said: “Monetary policy is the most powerful weapon the authorities have in their hands right now and they need to use it.”

The Institute of Directors (IoD), in its latest quarterly business-opinion survey, says confidence among firms has slumped to a record low.

The proportion of directors more versus less optimistic about their companies’ prospects compared with three months ago fell to -37% from -25%. Also, the balance of directors more versus less optimistic about the investment outlook dropped from -34% to -48%.

Though most directors say their businesses continue to do well amid the gloom, there are fears this will not last.

Graeme Leach, the IoD’s chief economist, said: “The falls in business confidence and investment intentions take us into completely uncharted territory. Actual business performance is holding up remarkably well for now, but we don’t expect it will be maintained at current levels.”

Economists are unanimous that the Bank will cut rates this week following official figures showing a bigger-than-expected drop in gross domestic product in the third quarter.

The “shadow” MPC, which meets under the auspices of the Institute of Economic Affairs, votes for a half-point cut to 4% this week.

One member voted for a full-point cut, six for a half-point reduction and two to leave Bank rate unchanged. Most members have a “bias” to cut rates further after this week’s move. A survey of analysts by Ideaglobal.com, the financial-research company, has a median expectation of a 3.75% rate by the end of the year.

UBS, in a new forecast, says Britain will be harder hit than other economies by the recession. It predicts a 1.8% drop in GDP next year, worse than the eurozone (0.9%) and US (0.6%).

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