Cut interest rates NOW to avoid long recession, says MPC member as report warns of 'economic horror movie'

David Blanchflower said the country risks at least a year of negative growth unless monetary policy is relaxed.

His warning came as a leading forecaster warned Britain is already struggling against the slide into recession.

The Ernst & Young ITEM Club says economic growth is being 'crushed between the jaws of world credit and commodity markets' and will to slow to just 1 per cent in 2009.

City sickener: The stock market is already plunging amid fears of a recession

Inflation soared to a shock 3.8 per cent last week - the fifth consecutive monthly rise - amid fears it could reach five per cent by the end of the year.

The Bank of England has so far steered away from cutting rates due to the risk of spiralling inflation.

But Mr Blanchflower insists the opportunity to address the dire economic situation is running out. 'It's not too late to stop it but we have to act now,' he said today.

The economist, who has consistently voted for rate cuts at this year's MPC meetings, said: 'I think we are going into recession and we are going into one right now.

'We will probably have three or four quarters of negative growth but the risks are to the downside.'

He added: 'Monetary policy has been far too tight for far too long. We can't just sit and do nothing as we have done for too long.'

'Our job is to focus on inflation in the medium term so we have to look through the short-term shock from oil and commodity prices.'

Ernst & Young's report says Britain is entering 'an economic horror movie', where surging oil and food prices will add to suffering over falling property prices and higher borrowing costs.

Peter Spencer, chief economist to E&Y ITEM Club says:  'Both on the high street and in the housing market it is going to get a great deal worse before it gets better.

'We have already seen a housing crisis that has morphed from a credit crunch to a general collapse in confidence as prices have tumbled.'

He says the risks of a recession in Britain have 'risen significantly' and believes that house prices have much further to fall.

Crash Gordon: Mr Brown's spending frenzy has left Britain with little room to fight a recession

The situation is worsened by the fact that the government's hands are tied because of the huge debts that have already been run up since Labour came to power.

And rising inflation makes it even harder for the Bank of England to reduce interest rates to kickstart economic growth.

'As with any horror movie, there is an escape route, but it is not an easy one,' says Spencer.

'It is imperative that wage increases remain restrained despite the tremendous pressure from food and energy cost inflation.'

The ITEM urges the government to stand firm against excessive public sector pay demands from the unions, warning it would only lead to higher interest rates and a recession.

Because of the sharp slowdown on the high street, ITEM expects that an interest rate cut could come as soon as November.

UK rates are currently pegged at 5 per cent, but Spencer forecasts that the base rate could drop to 4 per cent by the end of next year. This could help spark an economic recovery in 2010, he says.

But families struggling to pay higher utility and mortgage bills 'will be lucky to see real disposable income growth of 1pc this year', ITEM warns.

The credit crunch and Labour's own economic policy has also played havoc with the Treasury's coffers.

ITEM says that the debacle over the scrapping of the 10p tax rate cost Chancellor Alistair Darling £2.7bn because he was forced to increase personal allowances to head off a back bench rebellion.

Tax receipts will be far lower than expected because companies will not make as much money in the tougher economic climate, forcing the government to hike borrowing.

In April and May, net borrowing was £12.7 billion, compared with £8.4 billion a year ago.

If this continued for the rest of the year, ITEM calculates that net borrowing will hit £52bn in the 2008/09 tax year, £9 billion more than forecast by the Treasury in the Budget.

It forecasts the budget deficit will top £50 billion and that the 'current' budget deficit, which is used to determine the golden rule, will remain in deficit for three years.