BUSINESS says the Bank of England should slash interest rates again this week to prevent the recession turning into depression.

“The rapid worsening in the economic situation and growing fears over rising unemployment reinforce the need for the MPC [monetary policy committee] to continue with aggressive interest-rate cuts,” said David Kern, economic adviser to the British Chambers of Commerce.

“To alleviate the most devastating consequences of the serious recession, we urge the MPC to cut rates by a full 1% on Thursday, to 1%. A prolonged depression can still be averted if the authorities adopt forceful measures.”

A job-market survey by KPMG and the Recruitment & Employment Confederation, to be published on Wednesday, will show a further significant weakening in employment, driven by a slump in demand for staff.

The Bank is widely expected to cut interest rates again this week, taking them down to the lowest level since it was founded more than 300 years ago, despite a series of moves that have seen Bank rate drop from 5% to 2% since October.

The City is looking to the MPC to cut by at least half a point on Thursday, following a broad hint in the minutes of its December meeting that there was more easing to come.

A half-point cut would take Bank rate, already at its lowest level since 1951, down to 1.5%, the lowest since 1694 when William III was on the throne.

Not everybody thinks the Bank should cut rates further. The “shadow” MPC, which meets under the auspices of the Institute of Economic Affairs, says the Bank should hold rates at 2% this week and instead focus on other measures for boosting the economy, including so-called quantitative easing. While three members of the shadow MPC vote for rate cuts, the remaining six say cutting rates further will not have any additional benefit.

“The events of 2008 have shown that monetary policymaking consists of much more than the setting of interest rates by a committee of the great and the good,” said shadow MPC member Tim Congdon.

“I believe that, handled properly, debt-management operations could add 5% to bank deposits in the first quarter of 2009, ending the liquidity squeeze and the worst of the recession.”

The shadow MPC calls for a series of such “unconventional” measures, including expanding the money supply by underfunding government borrowing – halting the issuance of gilts – discouraging the flow of deposits into National Savings, normalising money markets and directing the banks to lend to companies and households rather than to their own financial subsidiaries.

“There was a general view that the benefits from further cuts in Bank rate were subject to rapidly diminishing returns and that there was a need for additional monetary instruments,” the shadow MPC said.

“One suggestion was that the remit of the Debt Management Office should be altered to allow the government to borrow directly from the banking sector, in order to boost bank liquidity and the broad money supply.

“Several members criticised the government’s incoherent and damaging approach to the banking system. In particular, senior politicians’ populist demands for lower borrowing costs were logically incompatible with the need to recapitalise the sector.”

Rapid reductions in interest rates have taken their toll on savers, with some accounts now paying as little as 0.1%, even before this week’s expected cut in Bank rate.

However, lower rates have so far failed to stimulate lending. The Bank’s latest credit-conditions survey, published on Friday, showed that banks tightened credit availability to businesses and households in the final three months of last year and expect to do so further in the first quarter of 2009.

Treasury sources said yesterday that a series of options were being considered to stimulate bank lending. They include government guarantees to enable the banks to access wholesale funding markets, taking “toxic” assets off bank books and a possible further recapitalisation of the banks.

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