Capital's struggling firms call for rate cut

The London Chamber of Commerce (LCC) found 58% of firms expect trade to slow this year, up from 9% 12 months ago and 25% on New Year's Eve.

Business leaders in the capital urged the Bank of England, led by Mervyn King, to cut rates from 5.25% to 5% on Thursday to make borrowing cheaper and boost economic growth.

London, particularly the City, is the engine room of the British economy but is facing a sharp slowdown as a result of the credit crunch.

The Bank's monetary policy committee (MPC) has cut rates from 5.75% since December but is reluctant to move as far as many would like because of concerns over rising inflation.

Dr Helen Hill of the LCC said: "The credit squeeze is genuinely worrying for businesses at the current time.

"Reduction in availability of corporate credit will have serious implications, particularly for many of the capital's smaller businesses whose confidence in their own immediate prospects has already been dented.

"The MPC must react positively to these concerns with a reduction in interest rates this week."

The comments came as the Labour-dominated Treasury Select Committee of MPs accused Chancellor Alistair Darling of being too optimistic about the state of the economy.

In his first Budget last month, Darling estimated that the economy will expand by between 1.75% and 2.25% this year - well above the 1.6% expected by independent economists in the City.

Committee chairman John McFall said: "The Treasury's forecast of economic growth in the next two years is more optimistic than the consensus view. There are significant downside risks to the economy and therefore potentially to tax receipts.

"Some of the very things that have kept our economy growing over the last decade may start to cause us problems, and the 2008 Budget may not have recognised this fully."

The credit crunch which followed the collapse of the subprime mortgage market in the US has prompted banks and building societies to reduce mortgage lending.

Libor, the cost of lending between banks, hit 6.01% last week, its highest of the year and well above base rates of 5.25% set by the Bank of England. The Bank is under pressure to cut rates to 5% on Thursday.

Economist Howard Archer of Global Insight said: "There is little doubt that the Bank will cut interest rates again, but the two crucial questions are: will the next cut occur as soon as Thursday? And how low will interest rates go?

"We believe the heightened downside risks to the growth outlook has swung the odds significantly in favour of the MPC cutting rates from 5.25% to 5% despite current elevated inflation risks.

"However, these inflation risks mean that it is not a stone dead certainty that the MPC will act on Thursday and the vote could well be close."