The deceleration in the service sector growth is worrying, as it comes despite punchy retail sales during the period Philip Shaw, Investec chief economist

And growth in the service sector - which has been fuelling the country's economic growth - has slowed faster than expected, according to figures from the Office for National Statistics (ONS).

The country's gross domestic product (GDP) in the last three months of the year grew by just 0.4% compared with the previous three months, taking the annual rate of growth to 1.7%.

Output from the service industries is estimated to have grown 0.6% over the quarter compared with growth of 0.9% the previous quarter.

And the annual growth figure for service industries was 2.2% compared with the previous annual figure of 2.5%.

The figures are provisional and might be revised.

Falls in production

"The deceleration in the service sector growth is worrying, as it comes despite punchy retail sales during the period," said Philip Shaw, chief economist at Investec.

We feel rates will come down quicker than anyone is currently thinking Martin Essex Capital Economics.

On Thursday fears of a slowdown in High Street spending were blown away by ONS figures showing retail sales had risen by 1.1% between November and December and by 6.4% in the year to December.

The ONS said that economic growth had been sustained by the UK service sector, mainly thanks to the retail and motor trade industries.

But in October to December, output and production industries were estimated to have fallen. Energy and water supply were also thought to have decreased.

Interest rate cut?

"It's exactly as we expected, said Martin Essex, an economist at Capital Economics.

But he added: "While on the face of it, it may look quite respectable, growth is below trend and there's no sign it's going to get better in 2003.

We continue to believe rates will be left on hold in February Alan Castle, Lehman Brothers economist

"The services growth is also disappointing. We feel rates will come down quicker than anyone is currently thinking."

Interest rates have been held at 4% for 14 months in a row.

Minutes released by the Bank of England this week showed that two members of the monetary policy committee, which sets rates, voted for a quarter-point cut at their January meeting.

But Alan Castle, an economist at Lehman Brothers, thinks the majority of the committee are unlikely to move towards a cut after the latest economic figures.

"There shouldn't be any significant market impact as it's broadly in line with what most people were expecting.

"There is still room for a small upward revision. But the figures don't have a lot to say for Bank of England policy. We continue to believe rates will be left on hold in February."