April 3, 2008 / 9:24 AM / 12 years ago

Service sector slows more than expected

LONDON (Reuters) - The service sector slowed more than expected in March as confidence fell and firms’ margins were squeezed by a record rise in input prices, a survey showed on Thursday.

A chef prepares a salmon in the kitchen at The Ritz hotel in London during its 100th anniversary year, April 19, 2006. REUTERS/Catherine Benson

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.

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 in March, still above the 50.0 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 in March, 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 U.S. 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.

INTEREST RATE OUTLOOK

The Bank of England is widely expected to cut interest rates further in coming months to shore up the economy in the face of the credit squeeze.

Nevertheless, Bank policymakers are keeping a close eye on inflation, which has been running above the Bank’s two percent target since October and is expected to rise even further in the coming months.

The March survey provides little comfort on this score. The input price index rose from 65.6 to 66.2, the highest since the series began in July 1996. The output price index eased a touch to 56.2 but remained within firing range of February’s record high of 56.8.

“Price pressures persist, with cost inflation moving to a record high in March, and service providers continuing to pass on a significant chunk to their clients,” said NTC’s Smith. “This provides yet another reminder of the Bank of England’s dilemma.”

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