City predicts no early move on rates despite service sector boom

As the Bank of England's Monetary Policy Committee started its first meeting of the new year yesterday, a new survey showed one part of the economy, services, is still booming.

But City experts stuck to the view that the Bank would save the next rise in interest rates until February. Diane Coyle, Economics Editor, reports.

In sharp contrast to the subdued state of manufacturing, the service industries continued to boom last month. Output and orders were up, as were employment and prices charged, and the expansion would have been even faster but for chronic shortages of skilled labour.

The activity index for services reported by the Chartered Institute of Purchasing and Supply rose slightly to 57.6 from 57.5 in November. It pointed to a pace of growth less than the heights reached during the summer but still very robust.

The results came as a bit of a surprise to economists, who generally expect the economy to show pronounced signs of a slowdown before long. The survey came as a reminder that the economic picture is very mixed.

Even so, the signs of strength in the service industries are not expected to persuade the Monetary Policy Committee to raise the cost of borrowing today, at the end of its two-day meeting. On the other hand, the Bank is thought likely to make that move next month unless official figures signal meanwhile that a decisive slowdown in growth is under way.

Stephen Lewis, chief economist at Monument Derivatives, said: "Evidence that the UK economy is already slowing is far from conclusive." He predicted the Bank would stick to its ``better safe than sorry'' view, and increase interest rates in February from the current level of 7.25 per cent.

The 500 companies surveyed by the CIPS said new business had increased strongly from 58.0 in November to 60.9, the biggest jump since May, with the strongest growth in business services. Their backlog of unfinished work increased for the third month running.

Employment in services climbed for the 18th consecutive month as firms tried to increase their capacity to meet the demand. The report commented: "Firms widely reported skill shortages as a constraint to further expanding capacity."

Not surprisingly, the pressure on wages and salaries, also up for the 18th month in succession, sent prices charged to customers higher too. The average prices index rose from 50 - a level indicating as many price cuts as increases - to 53.1.

David Hillier, an economist at Barclays Capital, said the fact that businesses in the sector were passing on their increased costs was the most important feature of the survey. He said: "The inflation numbers will slip away from the Bank over the next few months."

Another natural result was that the respondents reported a big improvement in their optimism about future business. More than two-thirds said they expected their level of business to increase during the next 12 months, while only 6 per cent expected growth to slow.

Peter Thomson, director general of the CIPS, said: "Growth in the service sector still remains strong enough to generate concerns over capacity constraints."