NEWS
RELEASE

The UK's leading business organisation has doubled its call for a rate cut from 0.5% to 1.0% as it believes that the sharp downturn in the economy in recent weeks justifies a more aggressive approach.

As inflationary pressures recede and give the Bank more leeway on rates, the CBI said that a 1.0% cut would help underpin business and consumer confidence, and give some support to private sector spending.

John Cridland, CBI Deputy Director-General, said:

"We have talked to businesses of all shapes and sizes across the UK, and the need for a further rate cut is clear. The recession into 2009 will be both longer and deeper than expected, and we need the strong medicine of a full percentage point cut.

"The continued paralysis in the wholesale money markets reduces the efficacy of smaller base rate cuts, so a bolder step is needed. The markets are already expecting an aggressive cut, so concerns about the impact on sterling should be limited."

The CBI also said that the government should allow the ‘automatic stabilisers’ – the tax revenue shortfall and benefit spending overshoot caused by the downturn – to support the economy, rather than seek to offset the effect by reducing other budgets. It also suggested that public spending be pulled forward.

However, the CBI warned that the government should not add further to public sector borrowing, taking the three years 2008/09-2010/11 altogether. The recession is expected to increase public sector net borrowing to almost £100bn by 2010/11, and further increases could both restrict the Bank's scope to further reduce interest rates and raise concerns about the UK's fiscal sustainability.