Service sector cuts jobs at record pace in January

The UK's service sector shed jobs at a record pace last month, adding to expectations of another hefty interest-rate cut from the Bank of England today.

The services industry, which makes up about three-quarters of the economy, cut jobs for the ninth straight month and at the fastest rate in 12 years, said the Chartered Institute for Purchasing and Supply (Cips), as activity continued to shrink.

Hotels and restaurants suffered the worst contraction as they dramatically reduced prices and cut costs. But there were small, hopeful signs in the report, with the slump in business expectations and new orders slowing.

The purchasing managers' index for services rose to 42.5 from 40.2 a month earlier, close to the lowest level since 1996 – less than 50 shows a fall inactivity. The result was above expectations and the most positive since September, the month that Lehman Brothers went bankrupt.

Input costs for the sector, which surged last summer, rose at their slowest pace since 2001 as energy and transport prices fell. Rising import prices driven by sterling's fall accounted for any remaining price inflation.

The service-sector report followed a Cips surveys earlier in the weekshowing the construction and manufacturing industries still mired inrecession but slowing less.

The pound fell against the dollar, shedding some of Tuesday's gains, dropping 0.4 per cent to $1.4402. But sterling rose against the euro because the Cips survey showed the UK's service sector performing better than that of the eurozone.

Economists overwhelmingly expect the Bank's Monetary Policy Committee (MPC) to cut rates by half a percentage point today to a new record low of 1 per cent.

Andy Goodwin, an economic adviser to the Ernst & Young Item Club, said: "Despite the mildly better news today, the economy is in a deep recession and Item believes that interest rates should fall further – possibly to zero."

He predicted a half-point cut today and called for the Bank to begin quantitative easing, or printing money.

Despite signs that the impact of the recession could be slowing, the survey pointed towards continued contraction. The MPC is likely to take particular note of the high level of job cuts because they are the key driver of bad debts that would deter banks from lending, exacerbating the downturn.

Howard Archer, an economist at IHS Global Insight, said: "The bad news on the jobs front is currently relentless, which has serious negative repercussions for consumer spending over the coming months."

But he added that the data could indicate that the economy reached its worst point in December, when output contracted by 1.5 per cent.