Rate cut pressure grows

The Bank of England was under pressure yesterday to cut interest rates again after a new survey revealed the first signs that foot and mouth is slowing down the economy.

Hotels and restaurants suffered a sharp fall in sales during last month, dragging growth in the services sector down to its weakest rate for six months, according to the Chartered Institute of Purchasing and Supply. Transport companies are also reporting that the disease has put the brakes on their business, according to the institute.

The services sector has been the engine of Britain's economic expansion over the past five years.

City analysts said yesterday's figures increased the chances that the Bank's monetary policy committee will announce a cut in borrowing costs at its meeting today.

"The data probably make a rate cut a done deal. We look for a 25 basis-point cut but recent developments have made for some risk of 50 basis points," said Jeremy Hawkins, economist at Bank of America.

Service sector firms are also worried about the impact of the US slowdown, according to the Institute.

"Of the 10% of firms who expect their activity levels to be lower in a year's time than at present, a significant number mentioned concerns about the economic downturn in the US on future business levels," the institute reported.

After cutting rates by 0.25 percentage points in February, the MPC left interest rates on hold last month - noting that there were few signs that the British economy had been affected by the increasing concerns about the global economic outlook.

Since the MPC's last meeting, manufacturing has taken a turn for the worse, however, while the foot and mouth epidemic has proved far more wide-reaching in its impact.

Yesterday's evidence that services are slowing as well will reinforce the arguments of those MPC members who have been calling for lower rates. The US central bank has reduced the interest rate by 1.5 percentage points since the beginning of the year in response to a collapse in consumer confidence.

British consumers have yet to start tightening their belts.

Retail sales growth remained robust last month, according to the Confederation of British Industry, although most stores expect sales to slow this month.

MPC inflation hawks were concerned last month that household spending had not yet slowed sufficiently to allow for the government's planned expansion in public spending.

But analysts said that the fact that there were few indications of inflationary pressures in the economy meant that the hawks would probably be won around to agreeing to lower borrowing costs at today's meeting.