Services sector slows to five-year low

Hopes for a cut in interest rates were raised yesterday after lower than expected figures for the UK's service sector – accounting for 70 per cent of the economy – suggested that the economy is slowing faster than had been feared.

Activity in the services sector plunged to a five-year low in April, according to the Chartered Institute of Purchasing and Supply's purchasing managers index. The reading for last month, at 50.4, was down on the 52.3 shown in March and the lowest since March 2003.

Roy Ayliffe, director of professional practice at CIPS, said: "Purchasing managers in the UK services sector really struggled to protect their firms' margins. New orders fell; energy, fuel and food costs soared and pricing power was restricted amid further deteriorating economic conditions. These factors led to a depression in business confidence, particularly among hotels and restaurants, as well as financial services companies, who have been most directly affected by the credit crunch."

Input costs rose to a record high, leading companies to try to pass these on to consumers with higher prices – but competitive pressures and weakened demand had restricted their pricing power, said CIPS.

The weak data nudged the consensus among economists away from the presumption of no change in rates when the Bank's Monetary Policy Committee meets on Thursday

Malcolm Barr, JP Morgan Chase UK economist, said the call for a May or June cut had been "dancing on a pin-head", but this latest data could prompt the MPC into swift action.

Meanwhile April's Report on Jobs, from the Recruitment and Employment Confederation and KPMG, showed that permanent placements fell, while temp billings rose at the strongest rate since last November.