Record low interest rates have done little to get consumers spending again and the services sector is feeling the pain.

The Australian Industry Group/Commonwealth Bank Australian Performance of Services Index (PSI) shows the sector recorded the fastest rate of decline in more than a year in May.

In the same month, the Reserve Bank of Australia cut the cash rate to a record low of 2.75 per cent.

The index shows interest rate cuts had failed to lift consumer sentiment, Ai Group chief executive Innes Willox said.

The figures were a worrying sign for the economy, and indicated sectors like retail make not grow enough to compensate for the decline in mining investment, he said.

“The drop in service sector activity is particularly worrying as alternative sources of growth are now needed to make up for the loss of momentum as mining-related activity is set to peak and as commodity prices retreat further,” Mr Willox said.

The services sector includes accommodation, telecommunications and cafes and restaurants.

Commonwealth Bank senior economist John Peters said the weakness in the sector meant further rate cuts were likely.

He expects the RBA to cut the cash rate to 2.5 per cent in August, which would help support services industries.

“This rate cut plus other recent cuts working their way through the economy, together with the eight per cent slide in the Australian dollar since early May, should help boost activity and confidence in the household and business sectors,” he said.

The PSI fell 3.5 points to an index reading of 40.6 in May.

A reading below 50 indicates the sector is contracting and the lower the number, the faster the rate of decline.