Bank fixed on inflation amid recession talk

Businesses delivered fresh evidence on Tuesday that the economy risks sliding into its first recession since the early 1990s, reporting a sharply deteriorating climate across the country.

But inflationary pressure is also escalating, making it hard for the Bank of England to justify lowering borrowing costs for some time to come unless hard evidence comes through that the economy is diving into a prolonged period of contraction.

The British Chambers of Commerce, joining many lobby groups now amplifying their regular calls for lower interest rates, said the business sector was on the verge of a recession and unemployment could rise by as much as 300,000 by the end of 2009.

Its second quarter survey showed domestic conditions in the services sector at their weakest since the last time the economy shrank for two successive quarters - a technical recession.

Manufacturing also suffered, the report showed, but export sales and orders in both sectors were still growing.

That indicates the weaker pound is boosting demand for British goods and services overseas.

"The survey cast yet more gloom over the economic outlook by suggesting that the UK is within a whisker away from recession," said Paul Dales, UK economist at Capital Economics.

"But, at the same time, further evidence of rising price pressures means that the Bank of England's Monetary Policy Committee is unlikely to respond with lower interest rates on Thursday or, indeed, until much later this year."

RATES ON HOLD FOR NOW

The Bank is widely expected to announce rates on hold at 5 percent when it ends its monthly policy meeting on Thursday, given inflation is running at its strongest rate since the central bank was given control over monetary policy in 1997.

The BCC survey highlighted those inflation concerns, with the manufacturing sector contending with the toughest price pressures since the series began in 1997 and a similar situation in the dominant services sector.

"The survey provides yet another striking example of the Bank of England being trapped between the rock of markedly slowing economic activity and the hard place of elevated inflation pressures," said Howard Archer, an economist at Global Insight.

Negative news on the economy is now coming thick and fast. One of Britain's biggest housebuilders, Persimmon, said on Tuesday it sold nearly a third less homes in the first half of this year compared with last year and is cutting 1,100 jobs.

And top end estate agent Savills reported first-half sales of luxury homes in the once red-hot London market nearly halved.

The government said annual house price growth slowed to 3.7 percent in May from 4.9 percent in April.

That lagging official survey, which measures prices when mortgage loans are made, backed up a raft of other surveys showing a sharply declining market.

"The housing market correction is only in its early stages," said Seema Shah, a property economist at Capital Economics. "The credit crunch shows no signs of easing, while the economic and labour market outlook is rapidly deteriorating."

Trouble for Bradford and Bingley bank, Britain's biggest buy-to-let mortgage lender, showed no sign of ending as its shares hit a record low.

The credit crunch has hit indebted consumers hard, making it difficult to get hold of mortgages while higher living costs are also cutting first-time buyers out of the market.

The lending squeeze has also triggered the biggest cashflow problem for businesses in 16 years, according to the BCC.