Despite a welcomed half point interest rate reduction by the Bank of England, business groups are calling for rates to be lowered even further to alleviate the dangers of a major downturn.

Miles Templeman, director general of the Institute of Directors, said: “We strongly believe that a further interest rate reduction of 50 basis points will be required next month, if not before.

“Inflation was yesterday’s story, recession is today’s story and deflation is tomorrow’s risk. Interest rates are heading in one direction – down."

The British Chambers of Commerce believes interest rates must be cutdown to four per cent in the next four months.

The decision by the Bank's Monetary Policy Committee (BMPC) to make the emergency cut, which brought the current 5 per cent interest rate down to 4.5 per cent, came 24 hours earlier than planned.

In a statement released by the BMPC, it said an immediate cut was necessary to meet the 2 per cent target for CPI inflation.

CBI, the UK's official business representative in the European Union, thought that the rate cut was "essential and timely" and applauds the decision which will, hopefully, benefit the economy and stabilise financial markets.

The Federation of Small Businesses (FSB), which also welcomes the cuts, called for the reduction in line with recent figures that showed the effects of the credit crunch on small businesses.

In its survey of 6,000 respondents, 46 per cent saw a reduction in trade and a total of 40 per cent also reported an increase in the cost of loans and overdrafts. In addition, 51 per cent saw an increase in payment times, which highlighted the FSB's concern that large companies are improving their cash flow on the back of their smaller suppliers.

John Wright, the FSB national chair, said: "The reduction should be very helpful to Britain's small businesses but the cut will only come into play if the banks follow through and reduce their charges to small businesses accordingly. We would urge the government, now that it has a stake in the banks, to ensure all base rate cuts announced by the Bank of England are honoured by the clearers."