Freeze on interest rates likely as economic recovery slows

The Bank of England looks set to keep interest rates on hold tomorrow after Britain's dominant services sector slowed unexpectedly last month and fresh evidence pointed to a slowdown in the housing market.

The Bank of England looks set to keep interest rates on hold tomorrow after Britain's dominant services sector slowed unexpectedly last month and fresh evidence pointed to a slowdown in the housing market.

Companies in the sector that makes up two-thirds of the economy grew at the slowest rate for 15 months, a poll of managers showed.

The Chartered Institute of Purchasing and Supply (Cips) said growth in new business fell for the sixth month in a row, although prices charged by firms rose as companies sought to pass on higher energy costs.

Economists said the survey cemented the consensus view that the Monetary Policy Committee would freeze the base rate at 4.75 per cent tomorrow.

Howard Archer, at Global Insight, said: "While this is still a relatively healthy report, it is clear that the services sector has lost some momentum in recent months.... [it] probably pushes the odds a little bit further towards the Bank of England not raising interest rates again this year."

Yesterday's poll was the latest in a string of surveys that suggested the economic recovery was losing steam.

Peter Dixon, at Commerzbank, said: "The figures, combined with the manufacturing PMI last week, are indicating that the economy is losing its momentum. All this is going to show that the Bank of England can be far less forceful in raising interest rates than we thought a few weeks ago."

A spokesman for Cips said: "Some firms reported that activity in their markets had cooled, making it harder to win new business."

Meanwhile, figures from the Bank of England showed that consumers are less bullish about using their homes as collateral against big loans. In the latest sign Britain's housing market is cooling, mortgage equity withdrawal (MEW) slowed to £15bn in the three months to June from £15.4bn in the first quarter of the year.

It was the second consecutive quarter that MEW - also known as equity release - had slowed, albeit from a record £17.15bn in the last quarter of 2003, which was revised down from £17.45bn. The figures showed that MEW is equivalent to 7.6 per cent of households' disposable income, down from 9 per cent at the end of last year.

Halifax will reveal today whether it saw a slowdown in house prices in September. Last week, Nationwide defied doomsayers, saying house prices rose 0.3 per cent last month.

Separately, the British Retail Consortium said shop prices rose just 0.41 per cent in September against the previous year. Kevin Hawkins, the BRC director general, said the trend showed "there is no justification for a belief that high street inflation is a problem for the economy".