Britain's service sector growing at slowest pace for 5 years

Britain's service sector expanded at its slowest pace in five years, barely growing at all, a key survey showed today, prompting speculation that the Bank of England may cut interest rates again this week.

The latest monthly report of the sector, which accounts for over two thirds of the British economy and is closely watched by the Bank of England, showed confidence among firms fell to its lowest level since the aftermath of the terror attacks of September 11 2001 as firms struggled with the fastest rate of cost growth on record.

The survey, by the Chartered Institute of Purchasing and Supply and NTC, showed its monthly index of activity tumbled to 50.4 in April, the lowest reading since March 2003, from 52.1 in February. The new figure was much worse than the City had expected. A number above 50 denotes expansion, below 50 a contraction.

"With the manufacturing index also hovering just above the breakeven 50 level this is a very worrying development. The Bank of England has more faith in these types of survey data than it does in GDP so it suggests that there is a growing chance of further rate cuts," said James Knightley, economist at ING financial markets.

The input price index rose to 67.3 last month from 66.2, indicating a record rate of cost inflation as firms contend with higher fuel and good costs as well as a weaker exchange rate.

The rate at which companies are hiking prices eased slightly, albeit still remaining relatively.....continued below

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strong, with the prices charged index slipping to 55.2 from 56.2.

Policymakers are under pressure to cut rates again soon to shore up the economy but several members of the monetary policy committee have made it clear they remain concerned about inflation.

"With demand showing signs of faltering in line with the economic uncertainties created by the credit crunch and spending being squeezed by the seemingly relentless rises in costs, growth of activity perhaps unsurprisingly stalled during April," said Paul Smith, NTC economist.

"As sentiment fell to its lowest since 9/11 (attacks on the United States), the latest data therefore add to the arguments of those looking for a further loosening of monetary policy."

The business expectations index slipped to 65.3 from 65.8 in March - the lowest reading since October 2001.

guardian.co.uk © Guardian Newspapers Limited 2008