Scope for UK rate cuts

There is ample scope for interest rate cuts, according to DeAnne Julius, a member of the Bank of England's Monetary Policy Committee.

She told business leaders at the annual conference of the British Chambers of Commerce (BCC) that the UK was unlikely to follow the US into recession.

DeAnne Julius: Bank of England should cut rates

She also painted a bleak picture of the US economy, saying it had suffered a sharp slowdown that was unlikely to be reversed swiftly.

Dr Julius said that the "bubble has now burst" for the US economy and a "shallow" recession was likely.

Several months ago, many economists were predicting the slowdown in US economic growth would be gentle, providing the so-called "soft landing".

Dr Julius said this had not happened.

"The landing has been a hard one," she said.

Her concerns about the situation in the US have led her to argue that the Bank of Engalnd should be cutting interest rates faster than the majority of her colleagues on the MPC want to.

At the MPC's last meeting in March, she was outvoted seven-two when the Bank left interest rates unchanged, after cutting base rates 0.25% to 5.75% in February.

Steep confidence fall

Dr Julius said the US investment boom that produced sharp share price increases had also caused excess capacity in a number of sectors.

In turn, this led to a spate of warnings over the past few months that company profits would disappoint investors, and, consequently, share price falls.

"The combination of excess capacity and the sharp rise in the cost of capital [because of lower share prices] dramatically curtailed investment spending.

"On the consumer side, with over half of US households holding shares directly, it led to a steep fall in consumer confidence," she said.

'Protracted' recovery

Dr Julius said the question now was whether sharp cuts in US interest rates would succeed in stimulating economic recovery in the second half of the year.

"My own view is that this is looking increasingly unlikely," she said.

"It is more likely than not that the US economy will suffer at least a shallow recession and a protracted recovery, rather than a quick bounce-back."

She said that while there were close links between the US and UK in trade, investment and financial markets, the UK economy was unlikely to suffer such a sharp downturn.

"We will be affected, but because we did not experience their boom, we are unlikely to suffer the full brunt of their bust."

Better off in my shoes

Dr Julius said it was "an open question" whether the US government and central bank - the Federal Reserve - would be able to restore confidence and quickly reverse the excess capacity situation in the US economy.

She said the UK still had healthy growth and inflation below target.

This gave the Bank of England "ample scope" to respond to any economic weakening (by trimming interest rates) and "more certainty that such a response would be effective.

"In other words... I would rather be in my shoes than [Fed chairman] Alan Greenspan's," she said.

Business call for change

Dr Julius's comments were made in a presentation on the opening day of the BCC conference, at which UK business groups called on political leaders to promote a stronger enterprise culture.

Dr Julius - a former chief economist at British Airways and oil giant Shell - was received warmly by delegates, many of whom believe she has been more responsive to the needs of business than some of her MPC colleagues.

The BCC conference - expected to be the last major business event before the general election - also attracted speakers from the three main political parties.

These included the Prime Minister, Tony Blair, Trade and Industry Secretary Stephen Byers, Home Secretary Jack Straw, Conservatives leader William Hague and Liberal Democrats leader Charles Kennedy.