Evidence backs rate cut

The Bank of England is under mounting pressure to reduce interest rates again today after evidence emerged that the terrorist attacks on the United States have pushed the services sector into recession.

Employers and union leaders want the Bank to deliver a cut when it announces its decision at noon, after the latest snapshot of the sector showed activity dropping at its fastest rate since December 1998.

Order books were down across all types of company, according to the Chartered Institute of Purchasing and Supply, "particularly in the transport, hotel and restaurant sectors, where the immediate impact of cancellations following the terrorist attacks were widely felt". The institute's overall activity index fell to 48.1 from 50.9 the previous month, the first time it has slipped below the critical 50 breakeven level since February 1999.

"Confidence regarding future activity levels fell markedly in September, as widespread concerns over the global and domestic economic outlook were heightened by fears that the adverse effects of the terrorist attacks in the US could tip the global economy into recession," the institute said.

While companies are pessimistic about the economic outlook consumer spending remains robust, according to a separate survey by the Con federation of British Industry, which said high street sales grew at their fastest pace for five years in September.

"So far, consumers seem willing to spend, thereby helping to stave off an economy-wide recession," said Alastair Eperon, chairman of the CBI distributive trades committee. "But with inflation under control, another interest rate cut is needed to steer the economy through difficult times."

In a further indication that the economy is slowing, house price rises ground to a halt in September, according to figures from the Halifax bank. The view of the biggest mortgage lender that there was virtually no house price growth last month was in sharp contrast to that of its rival, Na tionwide building society, which this week said prices had risen at their fastest rate for eight years.

Halifax said the average cost of a property is now £93,986 - just £4 higher than a month ago. Last month's lacklustre performance means the annual rate of house price growth has fallen to 8.3% from 10.9% a month ago.

Martin Ellis, the bank's economist, said it was too early to say whether this was caused by the September 11 attacks, but added: "The risks of a sharper slowdown in house prices have increased."

A preview of the Royal Instititute of Chartered Surveyors' monthly housing survey - which is more forward-looking than the Halifax data - also suggests that the property market may be at a turning point.

The pessimistic news brought calls from union leaders for the Bank of England to follow the US Federal Reserve's lead and cut the cost of borrowing today to stimulate the economy.

"A further cut in interest rates today is key to building confidence and helping the beleaguered manufacturing industry," said the TUC general secretary, John Monks.

Analysts said that, despite yesterday's conflicting evidence, the Bank of England's monetary policy committee would be likely to be swayed by the negative overall outlook for the world economy after the events of September 11.

"In times like these, the Bank will pay less attention to the data, and more attention to the bigger picture," said Jonathan Loynes of Capital Economics.