Interest Rates Must Come Down To Save UK Economy

Leading economists have warned that recession is coming unless the government tidies up its finances and cuts interest rates.

Economic forecasters at Ernst & Young’s ITEM Club say that the credit market turbulence will mean that the Bank of England will have to cut interest rates from their current level of 5.5% to 4.75% by the end of the year.

ITEM thinks that the chances of a UK recession are still fairly low, but it predicts that economic growth will slow from 3.1% last year to 1.8% in 2008.

It commented: “With the prospect of slower growth this year and hence slower tax revenues, ITEM forecasts a grim outlook for the public finances.”

The forecast for the country’s net deficit has been revised to £14bn by ITEM, which is well above the £8bn deficit forecast by the Treasury.

Chief economic adviser to the ITEM Club, Peter Spencer, said: “The Treasury failed to take advantage of years of good growth to put our public finances on a sounder basis, so our ability to respond by easing fiscal policy has been compromised.”

In the US president George Bush has announced a series of tax cuts which are designed to re-ignite US economy. ITEM says that the UK government should be prepared to breach its own ‘golden rule’ and allow public borrowing to rise.

Sadly, the enormous expense of bailing out Northern Rock has put the country’s finances on shaky ground, and left the Treasury with little room for manoeuvre without further funding itself.

Even the Chinese do not believe that their vibrant economy is immune to a slowdown in the US. Zhang Tao, a senior official at the People’s Bank of China, squashed ideas that China could distance itself from the woes in the US economy. He said that his country’s exports will be badly hit if demand from America weakens.