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Last Updated: Monday, 4 July, 2005, 00:45 GMT 01:45 UK
Fresh calls for interest rate cut
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Shoppers have reined in spending
The UK economy is continuing to show signs of slowdown, a report suggests.

Optimism and output are improving but are still weak, the BDO Business Trends report said, and interest rates should start to "come down soon".

BDO believes a cut is "justified", but the report indicates that rates are likely to remain on hold until August.

The Bank of England's monetary policy committee (MPC) meets this week for its latest rate-setting meeting, amid speculation that rates have peaked.

The MPC raised rates five times between November 2003 and last August, with the base rate now at 4.75%. Its aim was to cool the UK housing market and try to slow consumer borrowing.

Last week's release of slower-than-expected first-quarter UK growth figures increased pressure for lower rates.

An abrupt slowdown in consumer spending meant the UK economy grew by just 0.4% in the first three months of the year, slower than previously thought.

Index slides

With the release of the BDO report, the firm's partner Peter Hemington said: "With inflation under control, we believe that a cut in interest rates is justified and that the MPC should act now."

The BDO output index - which predicts GDP movements a quarter ahead - slipped from 100 in May to 99.4 in June.

The outlook for the manufacturing sector - though improving - remained bleak, the report said. Despite increasing by 0.8 points to 97.7 points in June, it failed to recover the ground lost in May, it said.

Its optimism index - an indicator of GDP growth two quarters ahead - rose from 100.5 in May to 100.9 in June - an improvement but still below the levels recorded in the first quarter of 2005, the report said.

Optimism elsewhere

However, a separate report from the CBI and PricewaterhouseCoopers highlighted optimism in the financial services sector.

Growth was expected to resume in the next three months after a "static" quarter, the quarterly financial services report said.

It added that more firms are expecting profits, output prices and employment levels to rise.

Doug Godden, head of economic analysis of the CBI, said: "The expectations of growth and increasing profits, although modest by past standards, are nevertheless encouraging, following a period of stagnation."

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