Business activity in the UK services sector rose at its slowest rate in four months during March as downbeat companies struggled with price inflation at a 12-year high and forecast harder times ahead.

According to the CIPS/NTC Purchasing Managers' Index, activity slowed from a score of 54 in February to 52.1 last month.

While the March reading is still above the 50 divide between growth and contraction, it is only marginally ahead of November 2007, the lowest point since May 2003.

The data also revealed that the input price index, which measures the costs of running a business, rose to a record 66.2, the highest reading since the survey began in July 1996.

The survey said: “The increase in inflation was characterised by higher energy and fuel bills with the price of foodstuffs and labour also reported to have risen.”

At the same time, the business expectation index for March fell to 65.8, slightly above a six and a half year low recorded in January this year while the incoming new business reading softened to 53.4.

Today's figures are released exactly a week before the Bank of England's Monetary Policy Committee (MPC) will announce whether it will hold or cut interest rates from the current 5.25 per cent.

Opinion is divided over whether the MPC will reduce borrowing costs next month or wait until May, as it juggles inflation at 2.5 per cent, above the Bank's 2 per cent target while the economy slows under the weight of the credit crunch.

Howard Archer, the chief UK and European economist at Global Insight, said: "Markedly softer service sector activity in March, along with tighter credit conditions, heaps pressure on the Bank of England to cut interest rates again next Thursday despite current elevated inflation concerns."

He added: "It still looks a close call, but we expect the Bank of England to trim interest rates from 5.25 per cent to 5 per cent."

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