The British Chambers of Commerce (BBC) has warned that the Bank of England must cut interest rates if we are to avoid a recession.

David Kern, BBC economic adviser predicted that if the country is to survive the current slowdown, the next two to three months are crucial.

Interest rates have remained unchanged since April, and the majority of economists believe rates will be kept on hold this month.  But Kern believes this would further weaken the economy as businesses are facing narrowing opportunities in lending from banks.  Kern said: ‘A major recession can still be avoided, but the [Bank] cannot wait too long before acting. To reduce the threat of a severe economic downturn, the MPC must start cutting interest rates in October or November’.

The UK is particularly vulnerable due to the continuing rise in inflation – rates are expected to rise to 5% in September.  This is over twice the government’s target, set at 2%.  Coupled with a falling housing market, and rising unemployment, Kern believes the country could fall into recession if the Bank of England maintains it’s position.

The Bank of England’s monetary policy committee is expected to be cautious about any shifts in interest levels because of the threat from inflation.  According to the Council of Mortgage Lenders, any move in interest rates is unlikely until there is certainty that the country has peaked in inflation.

Research by Capital Economics states that as customer spend decreases and costs increase, retailers are suffering the most in the current climate.  The credit crunch is evident in all sectors now, and as consumers’ disposable income reduces, the economy is struggling to combat the impact of the slowdown.  Jonathan Loynes, chief European economist from Capital Economics said that:  ’are being squeezed from both sides at the moment; retailers are going to continue to struggle at least for the next year or so’.

The Office for National Statistics reported that food inflation rates have risen by 13.7% during 2008.  As commodity prices continue to rise, and consumers curb their spending, retailers are finding it increasingly difficult to pass on additional costs to customers.

According to a recent poll of nine economists, all agreed that interest rates are unlikely to move following September’s monetary policy committee meeting.  Other analysts who agreed with these verdicts included Jonathan Loynes of Capital Economics, British Retail Consortium’s Richard Dodd, and Robert Snook from the Centre for Economic and Business Research.

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