No dramatic impact on UK from credit crisis

This year's financial market turmoil will not have a dramatic impact on British companies, the head of the nation's top business lobby group said.

Richard Lambert's calm assessment of the prospects for businesses outside the financial sector should make comforting reading for policymakers as it suggests the economy might be able to weather the current storm relatively easily.

But the former Bank of England policymaker and Financial Times editor also said that inflation remained a worry.

"The further you get from the City the more confident people seem and are saying 'crisis, what crisis?'," Mr Lambert said in an interview ahead of the Confederation of British Industry's conference next week.

Many commentators expect the economy to turn sharply lower towards the end of this year as the credit crunch takes its toll on business and households.

Mr Lambert does not appear so pessimistic. "I think that what's happening in the financial world will translate into the real economy over the coming months, but our expectation is it won't be a dramatic impact."

"We want a rate cut. But obviously it's not a no-brainer because there are inflationary pressures in the UK ... that's a big consideration for the Bank (of England)," said Mr Lambert.

Minutes to the central bank's rate-setting meeting this month showed policymakers are worried that cutting rates too early could drive inflation even higher - a dilemma that is troubling rate setters around the world.

Financial markets are pricing in two rate cuts from 5.75 per cent next year and a strong chance of an easing before the end of this year.

But a surge in oil prices to just shy of $100 a barrel could dent the chances of a reduction before Christmas, and keep policymakers on high alert for signs that rising costs are driving up wage demands. The CBI's manufacturing survey this week also showed companies plan to raise their prices at the fastest rate in 12 years.

"Businesses are talking about inflation again." Mr Lambert said. "They're talking about inflation in energy costs and commodity prices and food imports and import prices from China and other places going up somewhat."

But he reckons that slower growth next year - the CBI is pencilling in 2.2 per cent growth compared with around three per cent this year - will give policymakers leeway to reduce borrowing costs early next year.

"If we're right and demand starts to slow in the coming months there will be space to cut rates and that will be appropriate and necessary in the early months of next year."