Mood darkens in UK service sector

The services sector includes businesses from banks to cafes

Confidence in Britain's services sector contracted in November at the fastest rate since at least 1996, a closely-watched survey has shown.

The UK services purchasing managers' index (PMI) dropped by more than expected to a new record low of 40.1 in November, from 42.4 in October.

The data boosted expectations the Bank of England will aggressively cut interest rates on Thursday.

This has weakened the pound, which tumbled against the dollar to $1.4664.

The pound has reached new lows against both the dollar and the euro this week, on fears that the UK downturn is gathering pace, forcing the Bank of England to slash interest rates dramatically.

Lower interest rates make it less attractive for foreigners to hold sterling deposits.

"I think a combination of much weaker activity and some early hints at deflation will give the Bank of England confidence they can cut rates more aggressively," said Ross Walker at RBS.

'Snowballing recession'

It's just another piece of terrible data out the UK and it backs up the idea that we'll get a big cut from the Bank of England this week Tom Levinson, ING

According to the index, which tracks the expectations of the managers, the services sector, which includes businesses from banks to cafes and makes up to 75% of UK economic output, has been contracting for seven months.

The index measures what businessmen think is happening to the economy, and how they expect to respond. It is widely seen as a leading indicator of future economic activity.

On Monday the Chartered Institute of Purchasing and Supply/Markit PMI survey showed that British manufacturers believed the sector was shrinking in November at the fastest rate since the figures began in 1992.

"Combined with the appalling numbers for manufacturing and construction, the survey confirms that recession is now snowballing and heading into deeper territory as 2008 draws to a close," said Paul Smith at Markit Economics.

The index measuring future business expectations in the services sector also fell below 50 for the first time, suggesting the government and the Bank of England's efforts to boost the economy have not yet brought the necessary effect.

A reading below 50 indicates a contraction.

"It's just another piece of terrible data out the UK and it backs up the idea that we'll get a big cut from the Bank of England this week," said Tom Levinson at ING.