THE Bank of England and the European Central Bank are set to cut interest rates significantly this week as Britain and Europe dive deeper into recession.

The Bank, which has cut its rates by two percentage points in the past two months alone, surprising the markets with a 1.5-point cut earlier this month, is urged by economists to cut by a further point this week.

The “shadow” monetary policy committee, which meets under the auspices of the Institute of Economic Affairs, votes for a full-point reduction in Bank rate to 2%. This would be the lowest level since 1951, equalling the lowest in the Bank’s 314-year history. It would also mark the steepest ever drop in rates.

One member, Patrick Minford, wants a 1.5-point cut, warning of “extreme credit tightness” in the economy. Four favour a full-point, two think it should be a half, and two opt for no change.

Roger Bootle, economic adviser to Deloitte, who wants a full-point cut, said: “The Bank must not make the Japanese mistake of taking action too late, when deflationary expectations have set in.”

Peter Spencer of the University of York and the Ernst & Young Item Club, said: “The MPC has been cutting rates aggressively. There is every reason to continue this aggressive programme in December. I can see no reason for holding back.”

The Bank’s latest inflation report showed that further rate cuts would be needed because of a sharp downturn in inflation. The Treasury, in its pre-budget report, predicted consumer price inflation would drop to just 0.5% by the final quarter of next year, well below the 2% target.

The Engineering Employers’ Federation’s quarterly survey, published tomorrow, will show a sharp across-the-board drop in manufacturing activity in the fourth quarter, with output, employment, orders and investment down.

Steve Radley, the EEF’s chief economist, said: “Companies are being hit with tighter lending conditions, higher borrowing fees and customers who are squeezing late-payment to the limit.”

A survey of analysts by Ideaglobal.com, the financial research company, shows a median expectation of a 0.75-point cut this week from the Bank and a half-point reduction by the ECB. This would cut the ECB’s main interest rate to 2.75%. Mike Gallagher, head of Ideaglobal’s research, said analysts were split on whether the Bank would limit itself to a half-point cut or go for the full-point reduction.

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