Without a cut in interest rates, the UK economy faces real difficulties in the year ahead with the threat of lower growth, higher unemployment and real problems for the manufacturing sector which could face up to 80,000 redundancies, the TUC says in a new report Cut or Bust - Why the Bank must cut interest rates in 2006 published today (Tuesday).

The arguments against an interest rate cut do not stack up when examined in depth, says the TUC, so the Bank of England should act early in 2006 to cut rates, which should ensure that this year is a better one than 2005 with economic growth at the top end of Treasury forecasts.

Interest rate hawks oppose cuts, says the TUC, because they believe that the economy is currently running at full capacity and that we face inflationary threats, including higher oil prices and rising wages.

But the TUC's detailed analysis set out in Cut or Bust - Why the Bank must cut interest rates in 2006 shows that neither are a reason not to cut interest rates.

Far from running at full capacity, official figures published in the Pre-Budget Report show that there is a higher than expected gap between what the economy could produce and what it actually produces of 1.75% of GDP.

Energy prices have undoubtedly increased but they have not fed through to increased prices across the economy with the consumer inflation rate, excluding energy prices, actually falling in recent months.

Nor have higher energy prices caused an increase in wages. Indeed earnings growth slowed in 2005, and, at 3.9 per cent, has consistently been below the level (4.5 per cent) that most economists consider inflationary.

Warning signs that the economy could hit the rocks without a cut in interest rates include a small rise in the unemployment rate in the last year. And although unemployment is relatively low, the TUC estimates that there could be up to 80,000 job losses in manufacturing in 2006.

Nor should the Bank worry that low unemployment carries an inflationary risk as there is a reserve of people who want to work but do not show up in unemployment figures. Cut or Bust - Why the Bank must cut interest rates in 2006 shows that 11 per cent of the working age population without jobs want to work.

'The UK economy has weathered global economic squalls comparatively well, and is on track to do better in the year ahead,' said TUC chief economist Ian Brinkley, 'but this could go wrong if the Bank fails to cut interest rates. The balance of risk is now of downturn, not inflation. The Bank must act sooner rather than later.'