Breaking finance and business news, tax information, jobs and more for finance directors and senior finance professionals.

Ahead of the Monetary Policy Committee decision on interest rates on Thursday, Richard Lambert, CBI director-general, said that the MPC faced a particularly finely balanced decision this time.

Economic activity and demand constrained 

He pointed out that the slowdown in the general economy since Christmas had been modest and that inflation was likely to pick up in the next few months. 

Weaker economic growth over the year, however, should keep inflation under control over the slightly longer term.

Lambert added that the credit crunch was pushing interbank and mortgage lending rates up, which is constraining economic activity and demand, despite the MPC’s attempts to loosen monetary policy through two recent interest rate cuts.

"It seems clear that another reduction in rates is in the pipeline. The Bank should make a quarter point cut now, rather than later, to help hard-pressed businesses and consumers," he concluded.

Room for manoeuvre 

Henk Potts, equity strategist at Barclays Stockbrokers said that pressure had been building and building on the Bank of England to reduce interest rates as the economic picture deteriorated and property prices fell. 

He pointed out that recent evidence also suggested that the credit crunch was starting to contaminate the wider economy.

“While inflation is likely to remain high for most of 2008, it should begin to moderate into 2009 as slower growth reduces capacity pressures, while commodity price inflation wanes, thus giving the Bank the room for manoeuvre that it requires. We think that the Monetary Policy Committee will cut rates by 0.25 per cent on Thursday and by a further 0.5 per cent by August, taking rates back to 4.5 per cent," Potts concluded.

Growth forecast downgraded

The CBI’s call comes as the International Monetary Fund’s (IMF) World Economic Outlook is expected to downgrade its growth forecast for the UK.

The IMF predicts UK economic growth to be 1.6 per cent, the weakest figure since the recession of the early Nineties. The Treasury puts its estimate of UK economic growth between 1.75 per cent and 2.25 per cent for 2008.

Chancellor Alistair Darling said that the IMF figure compared favourably with other countries.

Halifax reported on Tuesday that property prices had dropped by 2.5 per cent in February, while Nationwide said consumer confidence had fallen

The IMF said that the UK was particularly vulnerable to property prices. Although it believes that the UK is one or two years behind the US in terms of a crisis in the property markets, the IMF predicts a drop in housing prices by as much as 10 per cent this year alone.

Related articles

• Boards expect no private equity growth
• First quarter sees leap in failures
• S&P predicts UK housing correction

Related links

• CBI
• HM Treasury
• IMF
• Halifax
• Nationwide