Services decline adds to pressure on MPC

Britain's services sector shrank again last month, figures revealed yesterday, adding to the pressure on the Bank of England's Monetary Policy Committee to cut interest rates and announce new measures to stimulate the economy.

The Chartered Institute of Purchasing and Supply (Cips) said its key index of the services index came in at 43.2 for February, with any reading below 50 signalling a contraction in the sector, which accounts for three-quarters of the economy.

Economists took relief from the fact that the contraction was less severe last month than in January, in contrast to the latest data on the manufacturing and construction sectors, where Cips said this week that the decline is accelerating. Cips also said that job-cutting in the services sector seemed to be slowing. Philip Shaw, chief economist at Investec, said: "I would hesitate to be too confident for prospects for services, but there is some evidence that the decline is bottoming out."

However, there was little respite from other economic data published yesterday. The EEF, the manufacturing group, warned that companies were still seeing the cost of borrowing rise, despite the very aggressive interest rate cuts implemented by the Bank of England since last autumn. "Despite interest rates falling to a historically low level and the efforts to free credit markets so far, many manufacturers have yet to feel the benefit," said Steve Radley, the EEF's chief economist.

Howard Archer, chief economist at IHS Global Insight, said he expected the MPC to unveil further help for the economy after its latest monthly meeting today. The measures may include quantitative easing, the process through which the Bank of England pumps new money into the economy.

"We believe it is more likely than not that the MPC will cut interest rates by a further 50 basis points from 1 per cent to a new record low of just 0.5 per cent," Mr Archer said. "Quantitative easing is poised to come to the forefront in the Bank of England's ongoing efforts to stimulate the economy, and the MPC seems set to announce that it is now launching this measure."

The EEF warned that the Bank's measures might not be enough to stimulate some parts of the economy, and called for the Government to step up the pace at which it implements the various initiatives it has announced since the downturn began.

"Addressing the problems in the banking system remains a priority but some schemes to support lending to companies have yet to come on stream," Mr Radley said. "Time is now of the essence for Government and the Bank to put these in place and communicate clearly what is available to companies."