Midlands business have called for the Bank of England policymakers to be bold when they gather today to decide on future interest rate policy.
Commentators are expecting the Bank’s Monetary Policy Committee (MPC) to cut another one per cent – a move that would take base rate to its lowest ever level of two per cent – but some in the Midlands are calling for even more drastic action.
PricewaterhouseCoopers LLP in the Midlands believes the MPC should cut interest rates by 150 basis points to 1.5 per cent at its meeting this week in an attempt to stimulate the ailing economy.
Mark Smith, regional chairman of PwC in the Midlands, said: “This is no time for half measures. The November Inflation Report made clear that interest rates need to fall further to avoid inflation significantly undershooting its two per cent target rate in the medium-term. We see no reason for the MPC to delay making a further one-and-a-half percentage point cut in base rates in order to mitigate the risks of the recession turning into a full-blown depression.”
Birmingham Chamber of Commerce and Industry believes the economy is weakening faster than was predicted and needs another major boost with a one per cent cut.
Katie Teasdale, senior policy adviser at the Chamber, said: “A reduction in rates to their lowest level since 1939, combined with the measures announced in the pre-Budget report, should provide the economy with a welcome shot in the arm just before the crucial Christmas period.
“A Chamber survey indicates that businesses want to see a significant drop in interest rates to stimulate demand in a weakening economic climate.
“Manufacturers especially want to take advantage of lower interest rates which will make it more competitive for them in overseas markets.
“Businesses hope that a further cut will begin to have a positive effect on the housing market by stimulating demand. Needless to say a fall in rates will be good news for homeowners with tracker mortgages and will hopefully increase consumer spend benefiting retail and hospitality sectors.
“We need decisive action to boost confidence – and, of course, we need to see the banks passing on any cuts to their customers and ensuring they are supporting our businesses.”
Louise Bennett, the chief executive of the Coventry and Warwickshire Chamber of Commerce, said a fall to two per cent was necessary and is calling for further pressure to be placed on banks to pass on any cuts to business.
She said: “The Bank of England needs to take decisive action and then let that action take hold.
“I strongly believe that a further one per cent needs to come off interest rates followed by a period of calm to allow business and consumers to adjust to the new rate.
“If truth be told, the Bank is playing catch-up because of its refusal to cut rates earlier in the year over fears of inflation.
“But the stark nature of the economic downturn is forcing their hand now and they need to follow their actions of the last couple of months again this week.
“If the government can ensure those cuts are passed on, we then need to see time given for it to take full effect.”
The West Midlands chairman of the Institute of Directors believes there may even be scope to go further. Richard Boot acknowledged that most expectations were for a smaller cut of between 0.5 points and one point, but suggested the MPC needed to go forward in the wake of a not particularly generous pre-Budget.
“Doubts about the effectiveness of the fiscal stimulus means the onus is back on interest rates to stimulate the economy,” said Mr Boot.
“If the MPC truly believes that inflation is yesterday’s problem there must be a good possibility of a cut to 1.5 per cent. At this stage we don’t think they will go further than 1.5 per cent, owing to the need to retain ammunition for 2010.”
George Johns, economist at Barclays Capital, said: “The brutal decline in activity highlighted by the business surveys raises the risk that the recession may be even deeper than many expect, further justifying the need for further large cuts in the Bank base rate.”
IHS Global Insight’s chief economist Howard Archer is predicting a cut to two per cent when the MPC votes later today.
He said: “Latest data and survey evidence point to deepening contraction in economic activity as well as rapidly diminishing inflationary pressures.
“Meanwhile, credit conditions remain very tight. Consequently, there is a compelling case for the Bank of England to cut interest rates by one per cent.”