The Bank of England “must not shy away” from cutting interest rates in September if a disorderly Brexit is on the cards, the Institute of Directors has urged.

The appeal from the IoD’s chief economist Tej Parikh, came after the Bank of England’s Monetary Policy Committee (MPC) voted unanimously to keep interest rates at 0.75 per cent.

In its quarterly inflation report, the MPC warned that there would be a one in three chance of a recession in the first quarter of 2020 even without a cliff-edge withdrawal from the European Union as the strain of Brexit uncertainty takes its toll.

It also slashed its growth forecast to 1.3 per cent for both this year and next – down from the 1.5 per cent and the 1.6 per cent previously predicted – and cautioned that “the sterling exchange rate would probably fall, CPI inflation would rise and GDP growth slow” in the event of a no-deal Brexit.

The MPC said that the interest rates could go in either direction as it would need to balance the need to cool inflation caused by the plunging pound, while also providing support for a flagging economy.

The pound has already tumbled by 6 per cent since the Bank's last inflation report in May as fears of a no-deal Brexit mount in light of Prime Minister Boris Johnson’s hardline stance in negotiations with the EU ahead of the October 31 deadline.

Mr Parikh said the MPC was right to be cautious by holding interest rates until there is clarity on the nature of Brexit, but that “all eyes” would be on its next meeting at the start of September.

“If a disorderly exit from the EU is on the cards, the Bank must not shy away from lowering interest rates in advance to support businesses and households through the turbulence,” he said.

“Waiting until after the fact could lower the impact of any action taken.”

Chair of the IoD’s Cumbria branch, Barry Leahey, added: “Business leaders have an extremely tough job at balancing the books already.

“Any assistance the interest rate can leverage for business would be repaid many times if it allows business to grow or in a worst-case scenario, survive.

“At the IoD we want to be able to concentrate on growing our leaders, so a favourable interest rate would allow them to get on with developing and taking the county forward.”

Rob Johnston, chief executive of Cumbria Chamber of Commerce, agreed that the Bank of England had done the right thing.

He said: “The economy remains fragile. Businesses are telling us that sales have weakened, and they remain under pressure from rising wage costs.

“With inflation hovering around the Bank’s target of 2 per cent, any change to the base rate now would have been a surprise.

“And if, as is starting to look more likely, we’re heading for a no-deal Brexit in October, the next move in rates could be down rather than up.”

The Bank of England has upped its UK growth outlook to 2.1 per cent in 2021, though it admitted its forecasts were heavily skewed by financial markets now pencilling in a rate cut to 0.5 per cent in the first half of 2020 as they see a 50/50 chance of a no-deal Brexit.

In a smooth Brexit deal scenario and recovering global economy – currently being damaged by the trade war between the United States and China – the MPC repeated that "gradual" and "limited" rate rises would be needed.

But even if rates were to rise twice to 1.5 per cent by the third quarter of 2022, it was still likely that borrowing costs would need to rise further to rein in inflation, the Bank said in its inflation report.