LONDON (Reuters) - The pace of contraction in Britain's giant services sector eased last month but soaring job losses and crumbling consumer confidence kept intact expectations of another interest rate cut this week.

The Bank of England has already slashed rates to a record low of 1.5 percent in a bid to limit the damage of the worst credit squeeze in generations. Investors are betting it will cut rates by another half point when it ends it monthly meeting today.

"It was still too early to call a bottom," said Matthew Sharratt at Bank of America. "As unemployment shoots up this year, more pressure on consumer spending could still see leading indicators failing to improve much or even exhibiting renewed weakness," he said.

Yesterday's survey of services companies chimed with indicators from the manufacturing and construction sector this week in suggesting the economy may have passed through the sharpest phase of the credit crunch.

However with firms shedding workers at a record rate and consumer morale falling further, analysts said the Bank of England could not afford to sit on its hands.

"The data are still very weak despite signs of improvement," said Alan Monks at J.P.Morgan. "We continue to look for a 50 basis point reduction in rates from the Monetary Policy Committee tomorrow."

Even if interest rates are cut to one percent this week, as many expect, it is by no means certain that businesses and homeowners will benefit.

The National Institute for Social and Economic Research said a rate cut today would be largely irrelevant and urged the central bank to focus instead on easing credit conditions by buying corporate debt.

The think tank forecast Britain's economy would contract by 2.7 percent this year, its worst performance in 60 years.

January's survey of services activity provided a glimmer of hope that the recession may be bottoming out. The headline index picked up to 42.5 from 40.2 in December. That was well above forecast and the highest reading since September.

However, while most components picked up from record lows hit at the end of last year, they remained consistent with further falls in output.

"While improvements in the activity and new business indices are welcome, the sector remains in a very weak state," said Paul Smith at Markit Economics. "Jobs are being slashed at a record rate."

On the basis of this week's services, manufacturing and construction surveys, Markit calculated Britain's economy was contracting at an annual rate of at least two percent.

Two other surveys yesterday also made for grim reading. Figures from the Nationwide building society showed consumer morale fell to a record low in January while data from the Recruitment and Employment Confederation showed demand for staff plunged at its fastest rate in more than a decade.

In recent months, deflation has replaced inflation as policymakers' biggest worry, but there are signs the pound's weakness on the foreign exchanges is pushing up some prices.

The British Retail Consortium said annual shop price inflation picked up to 1.1 percent in January from 0.5 percent in December, led by the higher cost of imported goods.