Pressure mounts for 1% interest rate cut » Central Government » 24dash.com

Interest rate-setters were today under pressure to relieve homeowners and borrowers with the biggest cut for 15 years as the UK plunges toward recession.

Experts said a fresh flood of dire economic news had raised the chances of a 1% interest rate cut from the Bank of England - the biggest since January 1993.

Anything less than a 1% cut would be "too little, too late" to combat the economy's steep decline, forecasters at the Ernst & Young ITEM Club warned.

The Bank's nine-strong Monetary Policy Committee (MPC) cut rates by 0.5% a month ago in response to the global banking crisis.

Since then official figures have shown UK output shrinking by a worse-than-expected 0.5% between July and September - the first quarter of contraction since 1992.

The UK's powerhouse services sector also shrank at its fastest pace for at least 12 years last month, while manufacturers saw a much bigger-than-expected fall in activity in September as the sector's worst decline for nearly 28 years continued.

Those on tracker mortgages pegged to the Bank's base rate should feel the full benefit of any cut. For those on standard variable rates a 1% cut would knock nearly £92 a month off the cost of a typical £150,000 mortgage - if passed on in full.

But lenders shaken by banking turmoil have been reluctant to pass on reductions in full to other borrowers as interbank lending rates - a key factor in pricing fixed-rate deals - remain high.

This could mean even deeper cuts are needed from the Bank, said Hetal Mehta, ITEM's senior economic adviser.

"With banks unwilling to fully pass on previous rate cuts, even more aggressive monetary loosening is required to have the desired impact on the real economy."

Interest rates were previously held at 5% for six months by the MPC due to inflation fears but are now set to tumble as recession concerns take centre stage.

The cuts come despite the official measure of inflation standing at 5.2% - more than double the MPC's official 2% target - underlining how much the worries over an economic slump have grown.

MPC "hawk" Tim Besley - who was voting for hikes as recently as August - has said rate cuts alone "will not be a magic bullet" and need to work in tandem with the bail-out of the banking sector announced last month.

But IHS Global Insight economist Howard Archer said: "We believe that the door is wide open for the Bank of England to "get on with the job" and deliver a full 1% cut."

Jaguar Land Rover chief executive David Smith called for a "courageous and decisive change in interest rate policy" - beginning with a 1% cut in the UK and by the European Central Bank.

"Then we need to see those getting much closer to US rates; much closer to the 2-3% level by the end of the year," he told BBC Radio 4's Today programme.

Any failure to slash rates risked pushing the UK into a prolonged recession with businesses having to lay off more and more skilled workers.

The car giant announced on Tuesday that it was extending a voluntary redundancy scheme which could lead to almost 600 jobs being cut.

"What we really need is this decisive action now to avoid that prolonged recession.

"All of us are expecting this to take through the end of next year before it works through so we are planning our business on a realistic basis and trying to keep investments in both technology and skills going."

The firm was "absolutely determined" to push on with an £800 million investment in green technology, he added.