CALLS for an investigation into the conduct of Northern Rock's directors are expected to be rejected today by the Financial Services Authority (FSA).

The city watchdog is due to release an internal report into the crisis that led to the first run on a British bank for more than a century and ended with the nationalisation that the UK is facing prolonged economic misery from the impact of the credit crunch.

It said the effect of tighter lending conditions on households and business "was yet to be fully felt" as it cut growth estimates for this year and next.

Its latest quarterly forecasts now predict UK growth of 1.8 per cent this year, weakening to 1.7 per cent next year.

The increasing pessimism contrasts with its previous expectations of two per cent growth this year and 2.1 per cent next year.

The CBI said: "The process of credit tightening will act as a drag on real activity, thus prolonging the slowdown into 2009."

It said the credit crunch has also magnified the effect of five interest rate rises in the run-up to July last year, intended to cool the UK's soaring growth and ease inflation.

Chief economic advisor Ian McCafferty said UK firms were in relative health after strong profits in recent years, but if banks' access to cash remained constrained, the impact was "as much a 2009 story as one for 2008".

He said: "Rather than being a short, sharp shock that would drive the UK economy close to, or into, recession in the near future, it is better thought of as a longerterm headwind that will hold back any recovery until well into 2009, and limit the potential pace of growth of the economy for some time thereafter."

The CBI also warned that the squeeze on consumer spending would be sustained for much of this year.

It said disposable income would be under pressure from soaring energy and food prices, while wage settlements and earnings were not expected to rise in response.

of the Newcastlebased lender.

It will criticise Northern Rock executives for relying on international money markets to raise finance, despite warnings of a credit crunch, according to a report in a national newspaper.

The FSA will also admit to a series of errors in its regulation of Northern Rock, but will argue for banks to be monitored more closely in the future rather than focusing on the past conduct of the bank's directors.

An investigation into the sale of company shares in the 18 months before the bank's collapse is also expected to be ruled out, the FSA adds.

The Northern Echo previously reported that four of the fiveman board made more than £6.5m from share sales, according to figures released by the London Stock Exchange.

At the time, North Durham MP Kevan Jones said: "There is nothing illegal about this. The directors have the right to sell shares, but they sold them at the height of the price and a lot of people have lost money over this."

Instead, the FSA is expected to ask for 100 more supervisory staff to carry out in-depth monitoring of bank activities in an attempt to avoid another Northern Rock-style crisis.

The Guardian newspaper said this would equate to one supervisor for each of the 100 biggest "high category" institutions monitored, which would include the UK's largest retail and investment banks.

Northern Rock's troubles began last September, when it was forced to seek emergency funding from the Bank of England, because the crisis in US sub-prime mortgage lending led to money markets drying up.

Meanwhile, the CBI is warning