We need a rate cut now, plead business chiefs

The call puts huge pressure on the Bank of England to slash its base rate when its Monetary Policy Committee makes its decision on Thursday.

It comes as the stock market staged a nervous rally after yesterday's record points fall, although some traders dismissed it as no more than a "dead cat bounce" that would rapidly fizzle out.

In early trading the FTSE-100 Index was up 126.8 points to 4716.10 following a bounce back on Wall Street last night. However, there was no relief from the storm clouds gathering over the economy wi th a warning that unemployment will rise to more than two million.

Howard Archer, chief UK and European economist at forecasters Global Insight, said only a half point cut to 4.5 per cent this week would make any difference. He said: "A quarter point cut will have no impact whatsoever. Things are looking increasingly serious by the day. No one seriously thinks inflation is the main problem anymore."

But some City figures said even more radical action was needed. Dr George Cooper, a hedge fund manager at BlueCrest and author of the Origin of Financial Crises, called for a three per cent cut in interest rates. He said: "The Bank of England should cut rates by about 300 basis points (three per cent)." Hopes of a world-wide round of interest rate cuts were raised by a one per cent reduction in Australia.

The call for cheaper borrowing came after another night of heavy falls on the Asian stock markets.

Japanese shares dropped to the lowest level in almost five years today amid growing fears over the widening financial crisis. The benchmark Nikkei 225 index lost 317.90 points, or 3.03 per cent, to close at 10,155.90 - its lowest finish since December 2003.

The index at one point had tumbled more than five per cent to 9,916.21 in the morning session, dropping under the psychologically key 10,000 level for the first time in almost five years, but managed to recover later in the day.

In New York yesterday, the Dow Jones industrial average closed below 10,000 for the first time since 2004. At its worst point, the Dow was down more than 800 points, an intra-day record, before rallying during the final 90 minutes of the trading day to close down 370 points, or 3.6 per cent, at 9,955.50.

But European shares opened sharply higher on hopes that the authorities will organise an EU-wide offensive to shore up the banking system.

European Central Bank Governing Council member Christian Noyer, who is also the governor of the Bank of France, said no French bank was close to bankruptcy, and the chief executive of Italian bank UniCredit said the Italian system was "absolutely solid".

But there were growing signs that the problems in the City were undermining the public's confidence in bankers.

Elissa Bayer, of Charles Stanley, who has worked in the City for 30 years, told BBC Radio 4: "People at the moment do not believe anything. The big fear is should I move my money from X bank to Y and that includes the big four houses in this country.

"At the moment people would like to go to Ireland, they would like to go to anybody. Yesterday a little old lady put the money under her pillow."

Ms Bayer stressed that confidence could not be allowed to be undermined to that extent.