Interest rate set to hit new low

Published on Wednesday 4 February 2009 20:18

INTEREST rates were set to be cut again today despite fresh signs that the economy may have passed through the deepest phase of the credit crunch.

According to a key survey yesterday, Britain's dominant service sector – which accounts for about three-quarters of the economy – shrank less than expected last month.

However, companies quizzed by the Chartered Institute of Purchasing and Supply (Cips) slashed jobs at a record pace.

The results of the survey left most analysts convinced that borrowing costs would be cut by a further half point today.

Meanwhile, investors sought solace yesterday in improved manufacturing data from China, which suggested that the downturn there may also be bottoming out.

Cips said its main purchasing managers' index for the service sector picked up to 42.5 last month from 40.2 in December.

While the reading was still below the 50 level that separates contraction from expansion, it was above City analysts' forecasts.

It also marks the highest reading since September – the month Lehman Brothers filed for bankruptcy protection.

The comparable purchasing managers' index covering service companies in the eurozone inched up to 42.2 in January from 42.1 a month earlier.

Yesterday's findings tally with manufacturing and construction indicators released earlier this week that showed modest improvements in the sectors.

CEBR economist Ben Williamson said the "surprise" turnaround in all three UK Cips' surveys showed "some signs that the pace of decline in activity across the board is slowing".

He added: "(Bank of England] policy-makers will be pleasantly surprised … but will by no means be putting the champagne on ice. We still expect the Bank to announce another 50 basis point reduction."

The services sector – spanning everything from financial services through to transport and restaurants – has been in contraction every month since May.

Despite unprecedented cuts in interest rates and falling energy costs providing some respite for hard-pressed businesses, the wider economic backdrop remains sombre.

Official figures released last month confirmed that Britain had entered a technical recession at the end of 2008.

Unemployment in the UK rose to almost two million at the end of last year and experts predict that figure could top three million by the end of 2009.

David Tinsley, UK economist at the Clydesdale Bank, said: "A call that the rate of decline is levelling off is still brave.

"Because the labour market lags activity, rising unemployment and the fear of losing your job will be with us for the rest of this year at the very least."

Business bodies were split on whether the central bank should cut rates. A half-point cut would take borrowing costs to a new record low of just 1 per cent.

Andy Willox, Scottish policy convener for the Federation of Small Businesses, said: "Small businesses are clearly worried that this economic lever has been used extensively over the last few months, but they are still struggling to get fair access to flexible, affordable finance."

But the Scottish Chambers of Commerce urged the Bank to cut rates by "at least" half a point.

Chief executive Liz Cameron said: "With the base rate at a historically low level, its usefulness as an economic tool to provide a stimulus is diminishing.

"Nevertheless it is necessary to take timely action to reduce the potential threat of deflation."

Hopes for a recovery in the Chinese economy helped lift Asian stocks earlier in the day.

A rise in China's official manufacturing index coupled with a surge in bank lending led to optimism the world's third-largest economy may soon be on the road to recovery.