The British Chamber of Commerce has warned the Bank of England that the country could face a massive economic downturn if interest rates are not cut quickly.
Predicting that the economic crisis in the UK will be deeper and lasting longer than first thought, the BCC urged the Government and the Bank of England to act swiftly in order to support the economy as best as possible.
Last week the Bank of England's monetary policy committee (MPC) had voted to keep the interest rate at 5 per cent.
By contrast, the BCC thinks that the decision not to lower the interest rate at the moment might endanger the soundness of businesses and employment, although a reduction to below 4.25 per cent might exacerbate price rises.
David Kern, economic adviser to the BCC, warned: "Waiting unduly before easing further would pose unacceptable threats to growth."
"The longer the MPC waits, the bigger the danger that the situation will deteriorate and the policy choices will become more difficult and more unpleasant later in the year."
At the same time the Chamber of Commerce revised their earlier prediction and forecasted that the GDP will plummet from 3 per cent in 2007 to 1.7 per cent, and even further down to just one per cent by early next year. The most important factor in slowing down economic growth is said to be dwindling consumer confidence.
The prospect of a weak growth combined with soaring coasts has sparked fears of a coming "stagflation" – inflation combined with economic stagnation.
Reports by the Confederation of British Industry (CBI) stating that exports for small and medium-sized companies have fallen unexpectedly in spite of the weak pound contribute to these fears.
Furthermore, 51 per cent of respondents in the CBI Trends Survey answered their costs had risen considerably due to higher energy and raw material costs, with only 7 per cent stating theirs had fallen. These growing cost pressures are now being passed on to customers.
Gerard Lyons, chief economist at Standard Chartered, comments: "It is possible that stagflation might reappear, as we are going through a slower phase of growth, although I do think the word can give the wrong impression."
"Food and energy costs are rising, which is causing the headline rate of inflation to rise," he says. "However, it's unlikely to spiral out of control because wage pressures are not as high."
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