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Service sector decline may affect Bank of England base rate decision

07 May 2008 / by Joy Tibbs
A Bank of England rate interest rate cut might be just what the economy needs judging by the latest UK services sector report from the Chartered Institute for Purchasing and Supply (CIPS).

CIPS data shows that in April the services sector grew at its slowest rate since 2003.

According to the institute, activity in the sector – which accounts for around two-thirds of the economy – fell from 52.1 on its index in March to 50.4 in April. Although a figure of more than 50 represents growth, April's figure shows that this growth was minimal.

It is thought that the CIPS study, which covers industries such as restaurants, banks and hairdressers, could prompt the first back-to-back interest rate cut in almost seven years. The base rate dropped from 5.25 per cent to five per cent last month and those with a mortgage will particularly be hoping for another cut when the decision is announced tomorrow.

However, minutes from the last Monetary Policy Committee (MCP) meeting reveal that members were divided over the action they wanted to take with regard to rates. While six members backed the 0.25 per cent cut, two wanted to keep the rate at 5.25 per cent and just one preferred a more drastic 0.5 per cent cut.

According to Reuters, "Most analysts expect the Bank of England to hold interest rates steady on Thursday but cut them for a fourth time since December next month."

And there are also fears over the impact of a rate cut on inflation, which has been on the rise in recent months. Indeed, Simon Ward from New Asset Star Management believes the risk of inflation is too great for a further rate reduction.

"This week's MPC rate decision is a particularly difficult call," he said. "Activity indicators are at levels historically consistent with a quarter- or even half-point Bank rate cut.

"The near-term inflation outlook remains troubling, however, with the May Inflation Report likely to show a larger and more prolonged overshoot than projected in February.

"My MPC-ometer suggests a 6-3 vote for unchanged rates this week. A cut is certainly possible but would be dangerous given current inflationary risks."

©Fair Investment Company Ltd