The Bank of England is under increasing pressure after Lloyds TSB warned that business confidence had hit a record low, lending weight to predictions that the UK could face a deep recession unless policymakers cut interest rates.

The Bank of England is under increasing pressure after Lloyds TSB warned that business confidence had hit a record low, lending weight to predictions that the UK could face a deep recession unless policymakers cut interest rates.

Research for the bank's business barometer shows that confidence hit the lowest level in the six-year history of the survey in July as firms battled a toxic combination of rising costs and slackening demand.

The bank found that concern about their own prospects among firms was accompanied by widespread pessimism about the outlook for the UK economy, as many worried about the prospect of a prolonged slowdown in growth. Some 60% of firms are more concerned about the outlook for the economy than they were three months ago.

The decline in confidence was most pronounced among firms in the services sector. This includes industries that are most exposed to problems in financial markets and to growing caution on the part of consumers amid concern about the housing market.

However, there has also been a marked increase in pessimism among firms in the industrial sector.

The gloomy view prevailed across all areas of the UK.

Trevor Williams, chief economist, Lloyds TSB Corporate Markets, said British businesses were being squeezed by the rising cost of raw materials and weakening export prospects in the slowing European market, despite a weaker pound.

"These pressures, together with the bleak outlook for domestic growth, are taking an inevitable toll on firms' confidence in their own ability to do business.

"There's a strong relationship between business confidence and the actual performance of the economy. And, with so many firms remaining downbeat, we can expect UK economic growth to remain weak well into next year."

The sober assessment comes a week after the UK's largest employers' organisation, the Confederation of British Industry, said the economy was in worse shape than expected and warned of uncomfortable times ahead.

Today, the British Chambers of Commerce throws its weight behind calls for the Bank of England to help companies, demanding a cut in interest rates within six months.

British Chambers says UK businesses are facing two very difficult years and there is now "a distinct possibility of technical recession" this year.

Predicting that UK unemployment is likely to increase by 250,000 to 300,000 over the next two to three years, British Chambers warns things could turn out much worse if the Bank fails to act.

"Whilst a marked slowdown in activity is likely over the next 18 months, even if interest rates are cut when inflation peaks, the correct policy decisions are still needed to ward off the threats of a serious and prolonged recession," said director- general David Frost.

"The longer the MPC (the Bank of England monetary policy committeee) waits before cutting rates, the bigger the danger that the economic situation would deteriorate."

Recent comments by Governor Mervyn King have indicated the Bank regards rising inflation as a greater threat than the downside risks to economic growth.

However, David Kern, economic adviser to British Chambers, said: "Our view is that the threats to growth are more serious and more immediate than the risks of higher inflation. The UK economy urgently needs an interest rate cut to counter threats of recession.

"Our central scenario envisages that the UK bank rate would be cut (from 5% to 4.75% in quarter four 2008, followed by an additional cut to 4.5% in quarter one 2009.

"A marked slowdown in UK activity is highly likely over the next 18 months, even if interest rates are cut in line with our central forecast. But, if the MPC decides not to cut rates in the next three to six months, growth prospects would be worse than in our central scenario."

British Chambers is concerned enough about the outlook to be prepared to cut the government some slack in terms of its borrowing targets. This could allow ministers to maintain spending despite reduced tax receipts.

"The chancellor will probably confirm in his next Pre-Budget Report that the government's fiscal rules will be altered, acknowledging that the original fiscal rules would be breached, at least temporarily. This would clearly undermine credbility and confidence in the short term. Nevertheless, we believe such a breach would be justified in order to help alleviate a very severe economic downturn," said Kern.