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Wednesday, 5 November 2008

UK service sector hits the buffers

LONDON, Nov 5 (Reuters) - Britain's dominant services sector shrank in October at its fastest pace since the series began in 1996 and optimism, employment and new and outstanding business all slumped to record lows, a survey showed on Wednesday.
October's services report from Britain's Chartered Institute of Purchasing and Supply increases the odds that the Bank of England will cut rates on Thursday by more than the half percentage point forecast by economists -- especially after grim manufacturing and construction data earlier this week.
The headline services activity figure of 42.4 was well below the mid-range forecast of 44.5 from a Reuters poll ECONGB and September's 46.0 reading. It marks the sixth straight month below the growth threshold of 50 for the sector, the longest losing streak in the survey's 12-year history.
Official data published separately showed manufacturing output fell for the seventh month running in September, the longest stretch of declines in 28 years.
The pound dropped around half a cent against the dollar after the data as investors bet a big rate cut from 4.5 percent would be on the cards for Thursday.
"The sharp deterioration in October's report on services could well be enough to tip the balance in favour of a full 100 basis points cut at tomorrow's MPC meeting," said Vicky Redwood at Capital Economics.
"Overall, these figures provide further evidence that the UK is entering a deep recession. Whatever happens tomorrow, interest rates need to fall to very low levels."
The survey's price data should reassure the Bank of England that British inflation will still fall from its current record 5.2 percent even if interest rates are cut aggressively from their present level of 4.5 percent.
Prices charged by the services sector -- which spans businesses from cafes to banks, and makes up three quarters of British economic output -- rose at their slowest pace since February 2006, and the sector's input costs rose at their weakest pace in 13 months.

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