UK service sector slows more

The service sector slowed more than expected last month as confidence fell and firms' margins were squeezed by a record rise in input prices, a survey showed yesterday.

The survey suggests the credit crunch is taking a toll and highlights the dilemma facing the Bank of England as it grapples with slowing growth and rising inflation.

The sterling fell and interest rate futures rose as the data, along with a warning from the Bank of England that the credit crunch looks set to intensify, boosted expectations the Central Bank will trim borrowing costs next week.

The Chartered Institute of Purchasing and Supply/NTC said its services activity index fell to 52.1 last month, still above the 50 mark separating growth from contraction, from a five-month high of 54.0 in February.

That was the weakest reading since November and well below the consensus forecast of 53.3.

"Markedly softer service sector activity last month, along with tighter credit conditions, heaps pressure on the Bank of England to cut interest rates again next Thursday despite elevated inflation concerns," said Howard Archer, an economist at Global Insight.

Firms' confidence also took a tumble as the credit squeeze intensified and evidence emerged that the US economy may already be in recession. The business expectations index dropped to 65.8 from 69.3 in February, to stand just a whisker above January's six-year low of 65.4.