Pressure for rate cut grows as slowdown hits services

THE ECONOMIC downturn has spread to the services sector, according to new surveys, a development which will step up the pressure on the Bank of England's Monetary Policy Committee (MPC) to vote for further reductions in UK interest rates.

Evidence of rising corporate failures and plummeting business confidence will also concern the MPC - which is rumoured to be considering holding an emergency meeting to discuss early rate cuts.

The MPC is next scheduled to meet on UK interest rates on 4 November - the same day the Chancellor makes his pre-Budget statement, it emerged yesterday.

The committee is due to deliver its verdict on rates on November 5, but in recent days speculation has mounted that the MPC could follow the lead of the US Federal Reserve, and cut rates in advance of its scheduled meeting.

Last Thursday, the Fed made a surprise cut in two key US interest rates, citing concerns about an incipient credit crunch as well as the unsettled conditions in the financial markets. The Fed's move prompted speculation that another hedge fund or bank could be in financial difficulties, and the latest welter of economic surveys will do little to cheer the markets when they open for trade today.

Business confidence is now at its lowest point since the end of 1992, according to the latest quarterly survey by Dun & Bradstreet, the business information company, while export confidence is at its lowest point for almost 10 years. There has been a sharp fall in confidence among wholesalers and retailers, as well as in the construction sector.

The latest Marketing Trends survey conducted by the Chartered Institute of Marketing (CIM) also suggests the economic slowdown is no longer confined to the manufacturing sector. The survey finds that 44 per cent of marketing managers now expect to miss their sales targets for the year, due to the deteriorating economic environment in both manufacturing and services. Confidence among marketing managers is now at a record low, according to CIM.

Figures from KPMG, the accountancy firm, reveal a significant increase in the number of companies going into receivership during the the third quarter of the year. Between July and September, KPMG recorded 300 receiverships, 37 more than in the second quarter.

Mike Wheeler, head of corporate recovery at KPMG said: "There are now clear signs that the number of companies going into receivership is on the increase. Many parts of the country, and especially the South-east, are now suffering a noticeable increase in the rate of business failure. A continued slowdown of high street sales and low inflation figures should make it easy for the Bank of England to cut interest rates further."

Ernst & Young, another accountancy firm, also reports growing signs of corporate distress. Eighty-six UK quoted companies issued profit warnings in the third quarter, up from 75 in the second quarter, according to Ernst & Young. There was a marked increase in the number of smaller companies issuing profit warnings.

Separately, the Confederation for British Industry found little change in manufacturing pay deals over the year, which suggests there is little inflationary pressure coming from the UK's industrial sector. The latest CBI Pay Databank shows that manufacturing settlements averaged 3.6 per cent between June and September.