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Downturn points to cut in rates Downturn points to cut in rates
(19 minutes later)
The Bank of England begins its monthly meeting on Wednesday amid calls for the biggest interest rate cut in 15 years. Gloomy figures from the UK's manufacturing and service sectors have underscored calls for an aggressive cut in the level of interest rates.
The Bank is widely expected to cut rates from 4.5% as its tries to prevent a long and painful recession. The Bank of England is expected to cut rates from 4.5% on Thursday as it tries to prevent a painful recession.
Figures released on Wednesday indicated that both the service and manufacturing sectors are continuing to shrink. Figures released on Wednesday indicated that both the service and manufacturing sectors are continuing to struggle.
Some business groups want the Bank to cut rates by one percentage point to 3.5% on Thursday, which would be the biggest cut since 1993. Some groups want the Bank to cut rates by one percentage point to 3.5%, which would be the biggest cut since 1993.
The interest rate decision will be announced at midday GMT on Thursday. The Bank's Monetary Policy Committee begins its two-day meeting on Wednesday and the interest rate decision will be announced at midday GMT on Thursday.
'Deep recession''Deep recession'
Gloomy figures on the manufacturing and the service sectors released on Wednesday indicate that the financial crisis is now hitting home.Gloomy figures on the manufacturing and the service sectors released on Wednesday indicate that the financial crisis is now hitting home.
We need a real shock to the system that a significant rate cut will provide David Smith, Jaguar Land Rover chief executiveWe need a real shock to the system that a significant rate cut will provide David Smith, Jaguar Land Rover chief executive
Activity in the service sector, the backbone of the UK economy, shrank in October for the sixth month in a row and was at its lowest level since 1996, according to an index compiled by the Chartered Institute of Purchase and Supply.Activity in the service sector, the backbone of the UK economy, shrank in October for the sixth month in a row and was at its lowest level since 1996, according to an index compiled by the Chartered Institute of Purchase and Supply.
Meanwhile, the Office for National Statistics said that manufacturing output fell for a seventh month in September - the longest run of monthly declines since 1980.Meanwhile, the Office for National Statistics said that manufacturing output fell for a seventh month in September - the longest run of monthly declines since 1980.
Manufacturing output fell by 0.8% in September, much worse than analysts' expectations, making output 2.3% lower than a year earlier, the sharpest decline since May 2003.Manufacturing output fell by 0.8% in September, much worse than analysts' expectations, making output 2.3% lower than a year earlier, the sharpest decline since May 2003.
Vicky Redwood, UK economist at Capital Economics, said Wednesday's data increased the chance of a one percentage point rate cut.Vicky Redwood, UK economist at Capital Economics, said Wednesday's data increased the chance of a one percentage point rate cut.
"These figures provide further evidence that the UK is entering a deep recession," she said."These figures provide further evidence that the UK is entering a deep recession," she said.
'Calmer waters''Calmer waters'
Last month, the Bank cut its base rate from 5% to 4.5% in an emergency co-ordinated move by the world's central banks.Last month, the Bank cut its base rate from 5% to 4.5% in an emergency co-ordinated move by the world's central banks.
Bank of England rate setters are under pressure to make an aggressive cut.
PricewaterhouseCoopers (PwC) has called for a cut to 4% on Thursday but says rates will need to fall further.PricewaterhouseCoopers (PwC) has called for a cut to 4% on Thursday but says rates will need to fall further.
PwC predicts that the UK economy will grow by 1% this year and shrink 0.5% in 2009 before reaching "calmer waters in 2010".PwC predicts that the UK economy will grow by 1% this year and shrink 0.5% in 2009 before reaching "calmer waters in 2010".
"The Bank of England Monetary Policy Committee needs to cut interest rates progressively to 3% or lower in order to prepare the economy for the recovery we hope to see in 2010," said John Hawksworth, head of macroeconomics at PwC."The Bank of England Monetary Policy Committee needs to cut interest rates progressively to 3% or lower in order to prepare the economy for the recovery we hope to see in 2010," said John Hawksworth, head of macroeconomics at PwC.
However, David Smith, the chief executive of Jaguar Land Rover, said a dramatic one percentage point was "absolutely vital" to kick start the economy.However, David Smith, the chief executive of Jaguar Land Rover, said a dramatic one percentage point was "absolutely vital" to kick start the economy.
With oil and wheat 30% down on a year ago, and the battle on for every pound customers have to spend, retailers are rushing to pass the benefits on Stephen Robertson, BRC director general
"We need a real shock to the system that a significant rate cut will provide. Stimulating demand is crucial to avoid a deep and long recession, and interest rates are the place to start," Mr Smith said."We need a real shock to the system that a significant rate cut will provide. Stimulating demand is crucial to avoid a deep and long recession, and interest rates are the place to start," Mr Smith said.
A report from KMPG, based on a poll of recruitment consultants, showed that job vacancies fell at the fastest rate in 11 years as demand for staff had fallen heavily. A report from KMPG, based on a poll of recruitment consultants, showed that job vacancies in October fell at the fastest rate in 11 years.
Growing confidenceGrowing confidence
There was one better piece of news from Nationwide Building Society's consumer confidence index, which showed the first monthly increase in confidence this year. Falling food and fuel prices could offer consumers a glimmer of hope.
Consumers were more pessimistic about the current economic climate but had become significantly more optimistic about how the economy would look in six months time. The British Retail Consortium said that shop price inflation stood at 3% in October, down from 3.6% in September and the second consecutive month of falls.
"The actions taken by the government and the Bank of England to support financial markets do seem to have buoyed consumers' confidence and could be responsible for the increased confidence in the future economic situation," said Nationwide's chief economist Fionnuala Earley. The fall in the inflation rate was mainly due to decline in food prices, it said.
But while confidence has improved compared with September, with a reading up from 51 to 55, it has plummeted since October 2007 when it was at 91. "With oil and wheat 30% down on a year ago, and the battle on for every pound customers have to spend, retailers are rushing to pass the benefits on," said Stephen Robertson, BRC director general.
Nationwide said there was a 40% chance that interest rates would be cut by half a point to 4%, and a 55% chance that they would be cut to 3.75%. The Nationwide Building Society said its consumer confidence index showed the first monthly increase in confidence this year.
Consumers were more pessimistic about the current economic climate but had become significantly more optimistic about how the economy would look in six months time, it said.
The index stood at 55 in October, up from 51 a month earlier but it is still much lower than a year ago when it stood at 91.