Bank faces calls to cut full percentage point

Pressure mounted on the Bank of England today for a full one percentage point cut in interest rates when its monetary policy committee concludes its meeting on Thursday.

The latest push for a halving of interest rates to a low of 1% came as the UK services sector was to be declared to be shrinking at near-record levels.

While activity in the sector which makes up the bulk of the UK economy remained stagnant last month at 40.2, according to the Chartered Institute for Purchasing and Supply, the outlook is dire.

December's 40.2 measure on the index was marginally better than November's 40.1 and not so bad as analysts' forecasts, but remains deep in recessionary territory since only a score of 50 or above is the sector growing.

Far worse was the industry's predictions for unemployment in the services sector, which slumped from 43.1 to a low of 40.5. There could be more bad news to come with job cuts at big investment banks such as Credit Suisse, HSBC and Goldman Sachs, along with far greater lay-offs predicted in financial services as Lloyds and HBOS complete their merger this month.

Although the companies surveyed said they had cut prices at their fastest pace in December, this appeared to have had little or no effect on demand.

Ross Walker, economist at RBS, said: "Unemployment began to accelerate significantly in the summer and the PMI [Purchasing Managers Index] survey data corroborate anecdotal ­evidence of more aggressive lay-offs.

"Overall, although marginally less negative than expected, the predominant sector of the UK economy remains in serious difficulty, with few meaningful signs of any turnaround."

Today's services survey backs up yesterday's worst construction-sector readings for 12 years and gloomy manufacturing data last week. Vicky Redwood of Capital Economics said: "The surveys still all point to a contraction in GDP of one per cent in the fourth quarter, so we still think a 100 basis point cut on Thursday is a ­possibility."

But Philip Shaw of Investec said: "The index appears to have stabilised and the fact that it is not in freefall anymore might reduce the argument for another very aggressive rate cut."