The rate of decline in business confidence has slowed slightly in January, according to a new report.

Findings from the Lloyds TSB business barometer, show that the number of firms feeling pessimistic about the UK economy fell one per cent between December and January.

Yet Trevor Williams, chief economist with Lloyds TSB Corporate Markets, says that the drop occurred before the Monetary Policy Committee's base interest rate cut, 'so the slowdown in pessimism may improve further once the effect of the cut takes hold'.

'It's encouraging that confidence in the service sector has risen, given that it is arguably the most exposed to the credit squeeze and most prone to a slowdown,' he adds.

According to the figures, up to 64 per cent of service firms expect an increase in their own business activity during 2008.

Lloyds also says that the fact that firms were not more pessimistic indicates ' there may be pockets of continuing economic growth', which suggests the predictions of a recession are unfounded.

Meanwhile, further research from Lloyds predicts that the interest-rate cut may only be 'short-lived'.