May 6, 2008 / 12:08 PM / 12 years ago

UK service sector stagnates, costs soar in April -CIPS

* CIPS/NTC Purchasing Managers Index for British services sector 50.4 in April (March 52.1), below 51.6 forecast. Click on <PMI/GBSA> for full data.

* Headline business activity index weakest since March 2003, expectations index (April 65.3, March 65.8) at the lowest since October 2001

* Highest input prices index since series began in 1996 (April 67.3, March 66.2)

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By Matt Falloon

LONDON (Reuters) - Growth in Britain’s dominant services sector all but dried up in April, sliding to a five year low as companies struggled against the sharpest rate of cost inflation on record, a survey showed on Tuesday.

Sterling fell and interest rate futures rallied as investors felt the weak activity reading might tip the balance in favour of an interest rate cut from the Bank of England this week, despite current inflation worries.

Confidence in the services sector fell to its lowest since the aftermath of the attacks on the United States in 2001, with fears intensifying about the impact of the credit crunch on the economy beyond the hard-hit financial sector.

The Chartered Institute for Purchasing and Supply/NTC purchasing managers’ index fell to 50.4 from 52.1 in March, the lowest reading since March 2003 and below analysts’ forecasts ECONGB of 51.6.

Any reading above 50.0 indicates growth, while anything below 50.0 indicates contraction.

“A slowdown in the overall economy is now well under way, even before the full effects of the credit crunch or housing slowdown have been felt,” said Vicky Redwood, an economist at Capital Economics.

“The Monetary Policy Committee probably still sees the upside risks to inflation as severe enough to pause at least a month before cutting again, but the decision is perhaps now a bit less clear-cut than it previously seemed.”

RECORD COST INFLATION

The input price index rose to 67.3 last month from 66.2, indicating a record rate of cost inflation as firms contend with higher fuel and goods costs as well as rising wages and a weaker exchange rate.

The rate at which companies are hiking prices eased slightly, but still remained relatively strong, with the prices charged index slipping to 55.2 from 56.2.

Further evidence of slowing economic activity — the services sector makes up nearly three-quarters of the economy — alongside strong price pressures will scarcely simplify the conundrum facing the Bank of England in setting interest rates.

Policymakers are under pressure to cut rates further soon to shore up the economy but several members of the MPC have made it clear they are growing increasingly concerned about inflation.

The BoE is expected to wait until June before trimming rates for a fourth time since December to 4.75 percent, according to the latest Reuters poll of economists [BOE/INT].

“With demand showing signs of faltering in line with the economic uncertainties created by the credit crunch and spending being squeezed by the seemingly relentless rises in costs, growth of activity perhaps unsurprisingly stalled during April,” said Paul Smith, NTC economist.

“As sentiment fell to its lowest since 9/11 (attacks on the United States), the latest data therefore add to the arguments of those looking for a further loosening of monetary policy.”

The business expectations index slipped to 65.3 from 65.8 in March — the lowest reading since October 2001.

“Confidence continued to be undermined by the credit crunch and worries over its negative effects on the economy (such as a depression of spending),” CIPS/NTC said.

“Moreover, concerns persist over margins as input cost inflation shows little sign of abating, whilst weakened demand is placing downward pressure on pricing power.”

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Editing by Gerrard Raven

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