November 5, 2007 / 11:58 AM / 13 years ago

Tighter credit slows service sector in October

LONDON (Reuters) - Tougher credit conditions and falling confidence slammed the brakes on the service sector last month, with growth slowing to its weakest rate in more than four years, a survey showed on Monday.

However, there was no let-up in inflationary pressures, suggesting the Bank of England may be reluctant to deliver a growth-boosting interest rate cut at its policy meeting this week.

The Chartered Institute of Purchasing and Supply/NTC activity index — covering businesses ranging from hotels to financial services — slid to 53.1 in October from 56.7 the previous month.

This was well below forecasts for 56.1 and took the index to its lowest level since May 2003.

The figures, released at the same time as data showing an unexpected fall in factory output in September, pushed sterling lower on the foreign exchanges as investors bet lower interest rates were only a matter of time.

There was a particularly marked slowdown in the financial sector, suggesting the near-collapse of mortgage lender Northern Rock NRK.L in September and worries over the housing market were making lenders more cautious.

“Given the UK economy’s exposure to financial services, it was perhaps remarkable given the recent financial shock that we hadn’t seen clearer signs of weakness in the PMI services index already,” said George Buckley, chief UK economist at Deutsche Bank.

“Whether this is enough to sway the Bank to cut rates this Thursday is another matter.”

OUTLOOK FRAGILE

Expectations for future business fell to the lowest level in more than a year, while inflation pressures remained strong.

The prices charged index rose to its highest level in seven months and input prices also rose, reflecting higher wages and rising energy costs.

Paul Smith, economist at NTC, said the combination of slowing growth and rising price pressures was likely to keep Bank of England policymakers in wait-and-see mode this week.

“On the activity and new business figures alone, the survey provides support to those looking for a cut in interest rates but, in line with Bank of England concerns, inflationary pressures continue to linger,” he said.

Bank chief economist Charles Bean said last week that the Bank could not afford to lower its guard against inflation even if recent credit market turbulence had softened the growth outlook.

He noted import prices were no longer bearing down on inflation and firms were finding it easier to make higher prices stick.

A Reuters poll of economists shows a 25 percent chance of a rate cut on Thursday. Most economists reckon interest rates will stay on hold at 5.75 percent until early next year.

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