Growth of the UK�s dominant service sector fell to a 13-month low in September, but continuing inflationary signs suggested no early cut in domestic interest rates.

Growth of the UK's dominant service sector fell to a 13-month low in September - signalling global credit market turmoil is starting to hit the real economy - but continuing inflationary signs suggested no early cut in domestic interest rates.

The City is unanimous in its belief that the Bank of England's Monetary Policy Committee will hold UK base rates at 5.75% when it concludes its latest two-day monthly rate-setting meeting at noon today.

The Chartered Institute of Purchasing and Supply said yesterday that its business activity index for services dropped from 57.6 in August to 56.7 last month - the lowest since August 2006 and marginally shy of the City's forecast of 56.8. It cited weaker expansion in the financial intermediation sector, in which firms reported that uncertainty arising from recent credit market turmoil had affected their trade.

However, the September reading was still well above the level of 50 which separates expansion from contraction and therefore continued to signal robust growth.

And the average prices charged index for service companies rose from 53.1 to 53.5 to signal the fastest rate of increase since April.

However, CIPS' survey of manufacturing earlier this week signalled this sector had also recorded slower growth in September.

Taken together, both surveys are likely to fuel further the now-majority expectation that the Bank of England will cut base rates by next March.

Consumers, already facing up to the five quarter-point rises in UK base rates between August last year and this July, have come under further pressure since as banks have in recent weeks hiked mortgage and personal loan rates amid the global credit market crisis.

However, the public's inflation expectations remain high and oil prices have been hitting records recently. UK firms continue to raise prices and there are signs of inflationary pressures in the food sector.

The case for the Bank to stand pat on base rates today would appear to be reinforced even further by the fact that the UK's FTSE-100 index of leading shares, of which the embattled Northern Rock is a constituent, has bounced back sharply from heavy losses sustained during the summer.

It yesterday rose a further 34.8 points to 6535.2 - its highest close since July 23.

Northern Rock shares rose 12% or 16.2p to 151.8p yesterday after sources said the Newcastle-based mortgage bank was in talks about a potential takeover by US buy-out firm JC Flowers and that New York-based Cerberus Capital Management was also interested. However, they are way adrift of the 639p level at which they closed just before it emerged three weeks ago that it had had to turn to the Bank of England as lender of last resort.

Lucy O'Carroll, director of research at Bank of Scotland's treasury division, said of CIPS' services report: "This survey provides some signs that the credit crunch is beginning to affect the service sector, much as the manufacturing survey did earlier in the week. The pace of recruitment has slowed, business expectations have weakened and overall activity has decelerated. All, however, remain at reasonably robust levels, suggesting that, so far at least, the sector believes the impact of the credit crunch may be fairly short-lived."

O'Carroll added: "As it sits down ahead of this month's interest-rate decision, due at noon the MPC may take this as a hopeful sign that the economy is in robust enough shape to ride out the recent storms. For now, the evidence of a slowdown appears insufficiently compelling for the committee to cut interest rates (this week).

"Furthermore, (the service sector) survey provides one less hopeful sign for the MPC - that the threat from pricing pressures has not gone away - and this is a timely reminder that it has to take into account not only the risks to the real economy but also the threat to its inflation-fighting credibility in any decision to cut interest rates."

O'Carroll believes the MPC might, if possible, prefer to wait until next year before cutting rates.

She said: "Any significant worsening in the economy or further evidence of tightening lending conditions could prompt a rate cut to 5.5% as soon as November, when the committee undertakes its next quarterly (inflation and growth) forecast. But the tricky balance that the MPC must strike between the state of the economy and the state of its reputation will make it reluctant to move on rates unless it feels it absolutely has to. The first quarter of next year might well be its preferred option."

In spite of the City's near-certainty that the MPC will stand pat today, the British Retail Consortium called characteristically yesterday for an immediate cut in base rates. Consulting actuarial firm Punter Southall also called for a cut today.

Punter Southall's John Postlethwaite said: "I would call on the Bank of England to cut interest rates to ease the current credit crisis. Mortgage lenders have had to increase their tracker rates because of the increased cost of borrowing, to them, and figures suggest that the mortgage and housing market are slowing down."

He noted annual UK consumer prices index inflation had been below the MPC's 2% target for two months and also cited a dip in sterling interbank lending rates from recent peaks and a cut in benchmark US interest rates.

Citing the total absence of bids in the Bank of England's two weekly auctions of £10bn of three-month loans at an annual interest rate of 6.75%, he claimed: "Amid so much bad press over the Northern Rock funding issue and the emergency funds for banks that the Bank of England priced out of the market, this could be an opportunity for a face-saving positive move."

But Howard Archer, chief UK economist at consultancy Global Insight, said: "The Bank of England may well feel under pressure to take early action to support economic activity, given the recent criticism that it has faced over its response to the credit crunch and the Northern Rock crisis. However, we believe the Bank will be impervious to outside pressure and will orientate its actions to keeping consumer price inflation to 2% on a two-year horizon."