The Bank of England is facing demands for an interest rate cut to head off the threat of a sharp economic slowdown.

The Ernst & Young ITEM Club, which uses the Treasury's economic model for its forecasts, said a cut from 5.75% will show the Bank of England responding with "appropriate vigour" to the risks posed by the current turmoil in money markets.

ITEM warned that GDP growth could drop by as much as 1% in 2008 and 2009 if a full-blown credit crunch develops, and added that more than one rate cut may be needed to prevent a significant slowdown.

However, the majority of analysts think the Bank of England's Monetary Policy Committee (MPC) will freeze rates after its meeting on Thursday.

A cut is more likely in November, they say, when the Bank will have more information about the effects of the credit squeeze on consumer confidence and economic growth.

The committee is likely to be wary of trimming interest rates at a time when high oil and food prices could cause inflation to spiral above the Government's target of 2%.

The Bank's last economic report in August said rates probably needed to hit 6%, although this now seems to be off the agenda.

Adrian Cooper, ITEM's economic adviser, said the MPC must act to offset the impact of tightening lending conditions on the housing market and consumer demand.

He said: "A cut would show that the Bank of England is at last responding with appropriate vigour to the risks to UK growth and consumer confidence.

"However, one rate cut is unlikely by itself to be sufficient to prevent a significant slowdown in growth next year to well below trend."

A study last week found that consumer confidence fell sharply after the Northern Rock crisis with spending intentions cut substantially.

Howard Archer, chief UK and European economist at Global Insight, said: "This rapid turnaround in interest rate prospects reflects the very real danger that an extended credit crunch will weigh down on an increasingly fragile-looking UK economy."

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