Ed Crooks reports

Interest rates have been cut by 1.25% to 6.25% in the past three months in attempt to bolster the UK's flagging economy and trade unions and employers are calling for further cuts in the cost of borrowing to prevent more job losses.

Robert Woolley and Richard Jeffrey debate the case for rate cuts

Economists expect interest rates to fall sharply over the next twelve months as economic growth stalls.

However the MPC's decision is too close to call and further cuts in the cost of borrowing may be postponed until later in the year.

Economic confusion

The Bank of England has a difficult task in assessing the state of the UK economy.

Professor Joseph Nellis: euro will influence Bank's deliberations

Retailers appear to have had a mixed Christmas, with gloomy trading in December followed by a stampede of customers heading for the sales.

And the Bank may also wait to see how the introduction the euro, Europe's new single currency, will effect the UK. A strong euro will increase the cost of imports in to the country, stoking inflation and reducing the chances of further rate cuts.

No change

In December, MPC members were unanimously in favour of cutting rates suggesting their mood is now firmly in the direction of lower interest rates to forestall a slide into recession. But most market analysts believe the MPC will hold rates steady this month.

Mark Miller, economist at Morgan Stanley, said: "I think the Bank will want to get a clearer picture of high street activity over December, plus they would like to see the progress of economic growth in the fourth quarter, which they will have by the February meeting. On balance the argument suggests they will leave rates on hold."

Business fears

However, job surveys out this week have led to calls for further cuts.

Eddie George: mixed rate signals

Most British businesses expect the economy to plunge into recession as economic growth falls below zero by mid-1999, according to a survey by business advisers BDO Stoy Hayward.

Meanwhile, an employment review by the Engineering Employers' Federation (EEF) reports that 18,000 engineering jobs were lost in the first nine months 1998 and predicts 100,000 would be lost by the end of this year.

EEF director general Graham Mackenzie said: "Engineering remains in the grip of recession. With UK interest rates at more than twice the level of our European competitors and poor prospects for the rest of 1999, there is still a need for further cuts in rates at the earliest opportunity."

But there has also been positive economic news with improving retail sales for November together with a survey indicating that the contraction of the manufacturing sector may have bottomed out and data showing consumer credit up strongly.

Two day meeting

Bank of England and MPC chairman Eddie George has sent mixed signals this week.

Mr George said on Monday that the large gap between UK and those interest rates in the 11 countries that have signed up to the euro, does weigh on interest rate decisions, given Britain's possible future entry into the single currency. Euroland members have interest rates of just 3%.

"If we are in a situation which is likely to deliver continued low inflation, then yes indeed interest rates can come down," he said.

However, Mr George has also said that higher growth and lower unemployment in the UK compared to its Euroland neighbours in recent times meant that Britain needed higher interest rates.