The UK economy is on course to shrink between July and September and could tip into recession, according to a closely-watched survey.

The S&P Global/CIPS UK Purchasing Managers' Index (PMI) found that rising interest rates and weaker household spending led to a sharp drop in demand for goods and services in August, the BBC reported.

The index looks at key economic measures such as orders and employment.

It showed that activity shrank in August after six months of growth.

The index's reading of 47.9 this month - anything below 50 marks a contraction - is the lowest level in two-and-half years.

But on the upside, economists said that the PMI figures, which measure the health of an economy, showed that the Bank of England's efforts to tame inflation were beginning to work.

Following the release of the PMI report, the pound fell against the dollar and City analysts lowered their expectations of where the interest rate would peak to 5.5% from 6%.

Interest rates currently stand at 5.25% following a succession of increases since late 2021 when it was close to zero.

UK inflation was 6.8% in July which, although slower than the previous month, is still more than three times higher than the Bank of England's 2% target.

The Bank's Monetary Policy Committee has voted 14 times in a row to raise interest rates. The theory is that by making it more expensive to borrow money, consumer demand will cool and price rises will slow.

However, repeated interest rate rises tend to drag on economic growth as it becomes more expensive for consumers and businesses to borrow and spend. Companies may also cut back on investment and jobs.

Pay has been rising at a record rate but the Bank of England has warned that wage increases will make it harder to get inflation down.