Industry body calls for rate cuts

Manufacturing slowed for the quarter

The British Chambers of Commerce (BCC) has called for "modest" interest rate cuts, amid signs that the UK economy slowed towards the end of last year.

In its latest economic survey, the BCC said there was a "disturbing" drop in service sector activity during the last three months of 2007.

The group warned that the economy would "slow markedly", but said a full-blown recession was not imminent.

The UK kept interest rates on hold this month at 5.5%, after a cut in December.

Analysts have said that the Bank of England and its monetary policy committee (MPC) are facing a difficult dilemma over rate cuts because the rate of inflation is stuck above 2% due to higher energy and food costs.

Cutting rates may quicken the rate of inflation, analysts warned, as consumers increase their spending and take out more loans.

"The latest results show the tough position that the MCP is in as it contemplates its next move," said David Kern, an economic advisor to the BCC.

Price plans

Many analysts expect another rate cut at the Bank of England's next meeting in February, after it lowering borrowing costs by a quarter of a percentage point to 5.5% from 5.75% in December.

Mr Kern said that a small interest rate cut would help to alleviate global financial problems that were triggered by a slump in the US housing market.

Faced with a slump in the value of investments linked to US mortgages, many banks have tightened up their lending policies and made borrowing more expensive, causing a situation called a credit squeeze.

Mr Kern said a rate cut in the UK would help ease this squeeze, stop a major dent being put in business confidence and erase the need for "dangerous" emergency initiatives later on.

While the latest BCC survey highlighted the contraction in the manufacturing and services sectors, it also revealed that firms have been facing increased inflationary pressures themselves.

The number of firms saying they would raise prices hit an all-time high at the end of 2007, even as demand slowed, said the BCC.

But it warned that companies - which have been especially hard hit by surging raw material costs - would be unlikely to secure such planned rises because consumers' disposable incomes were shrinking.