Britain’s services sector shrank for the first time in more than five years last month while services companies cut jobs sharply, a key survey of conditions showed today.

Bleak results from the latest CIPS purchasing managers’ survey of services companies showed activity in the sector falling for the first time since the start of the Iraq war in March 2003 as its levels of new and outstanding business tumbled and costs rose sharply. Businesses are expecting worse to come.

In a grim finding, today’s report also indicated that services companies responded to fast deterioriating conditions with job cuts - the CIPS gauge of employment in the sector suffered its steepest drop since the survey began 12 years ago.

Yet, as the Bank of England’s Monetary Policy Committee began its two-day meeting to set interest rates, City economists said there was no chance of an interest rate cut tomorrow. With the MPC anxious over still-rising inflation, analysts said that record cost pressures and rising prices in the services sector shown by the survey only reinforced the near certainty that rates will be kept on hold.

Despite the City’s conviction that base rates will be pegged tomorrow, the CIPS figures will fuel fears that the economy is rapidly sliding into a serious downturn.

The survey’s headline gauge of activity fell from 50.4 in April, to 49.8 last month, on a scale where any figure under 50 indicates contraction, ending nearly 60 months of continuous expansion.

While economists said that, in practice, the headline CIPS index previously had to fall to levels as low as 44 before services sector growth formally stalled in official data, the detailed breakdown of conditions in the sector will do little to dispel growing gloom over prospects.

In a harbinger of further woes to come for services business, the survey’s gauge of incoming new business fell into negative territory, indicating that demand is in decline, dropping to 48.0 last month, from an April reading of 51.5. Levels of outstanding business also fell at a faster pace, with the index of these falling to 43.1, from 45.1.

Services groups grew markedly more pessimistic over the outlook as a result, with their business expectations sinking to the lowest ebb since October 2001, in the aftermath of the September 11 terrorist strikes on the United States.

Yet there was scant sign of weakening activity helping to quell the price pressures vexing the Bank of England. The CIPS measure of input costs in the services sector, for staff, energy and materials, jumped to an all-time high for the survey of 67.7 last month, up from April’s figure of 67.3.

At the same time, the survey’s gauge of prices charged in the sector rose to 55.8, from 55.2, keeping it close to record levels.

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