Bank fixed on inflation amid recession talk

By Matt Falloon

LONDON (Reuters) - 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."