Evidence is mounting that the credit crunch and higher borrowing costs are damaging Britain's economy, with surveys on Monday showing service sector growth at a four-year low and the manufacturing recovery faltering.
Fears have grown in recent months that the global lending squeeze which forced the first run on a British bank in more than 140 years will strangle economic growth and could even have direr consequences. The US Federal Reserve has slashed borrowing costs by 75 basis points to 4.5 percent since the onslaught of the credit turmoil to help shore up the world's biggest economy but the Bank of England has held rates steady at 5.75 percent.
Economists believe the BoE's softly-softly approach is unlikely to last much longer. A no-change decision at its policy meeting this week is no longer a sure bet and money markets are pricing in at least two rate cuts by the end of next year.
"The steady stream of weaker data over the last few days has undeniably boosted the case for a pre-emptive interest rate cut to try to reduce the risk of a sharp UK economic slowdown," said Howard Archer, an economist at Global Insight. "Thursday's vote could well go right down to the wire." Services sector growth slowed much more than anticipated last month, according to the Chartered Institute of Purchasing and Supply, with tighter credit conditions and falling confidence in banking and property taking their toll.
Official data showed the fragile recovery in manufacturing slipped into reverse in September, with growth falling unexpectedly and notching its first annual decline in a year and a half. A tough retail environment has also forced commercial property landlords to slash lease lengths to attract and retain tenants, the British Property Federation and Investment Property Databank said on Monday.
The weak readings on the economy came a day after the head of the biggest bank in the United States, Citigroup, resigned following spiralling losses at the bank as a result of the US subprime mortgage market crisis.
However, with Britain's economy estimated to be growing at its fastest rate in more than three years between July and September - the height of the credit crunch - finance minister Alistair Darling was quick to urge calm.
Indeed, the Office for National Statistics said the fall in factory output would only take an estimated 0.04 percentage points off of the estimated 0.8 percent quarterly GDP growth in the third quarter and the Bank of England has been factoring in slower growth after five interest rate hikes since last August. "We are experiencing an unparalleled period of financial uncertainty caused by the problems in the US housing market," Darling told BBC radio.
"I believe that we can get through that ... our banking system is basically strong and ... we have a very strong economy." Lingering inflationary pressures are also an argument for the BoE to maintain its "wait and see" approach for now.
While headline inflation has dipped below the government's two percent target in the last few months, the CIPS survey showed companies are ramping up their prices at the fastest rate since March. "Sticky inflation expectations, higher oil prices and high readings on pricing in business surveys argue for caution from the MPC," said Malcolm Barr, an economist at J.P. Morgan.