Service sector surge renews new year rate rise speculation

Britain's dominant services sector expanded at its fastest pace for three years, reviving speculation of a new year rise in interest rates but doing little to stem sterling's retreat against the dollar.

The upbeat survey of office managers offset the bleak news from the high street overnight that showed both shopper numbers and sales values had weakened last month.

The Chartered Institute of Purchasing and Supply said its index of activity jumped to 59.8 last month, its highest since January 2004 and one of the strongest readings in the survey's 10-year history. A number above 50.0 denotes expansion.

Companies took on more workers than at any time in the past eight years, the survey also showed. Nick Verdi, at Barclays Capital, said: "This survey points to buoyant activity in the non-retailing part of the service sector. If RPI inflation heads higher than 4 per cent at the turn of the year, then it's likely that pay settlements will rise also. These factors increase the likelihood of further monetary tightening."

All the indicators - new orders, outstanding business, expectations and employment - rose. Some firms raised their charges in response to higher costs, extending the current period of output price inflation to 59 successive months. In contrast to the slight rise in raw materials' costs, the increase in charges was the weakest since February. "Buoyant activity does not appear to be at the expense of higher inflation," Karen Ward, at HSBC, said.

Overnight, the British Retail Consortium said retail sales posted their lowest growth in eight months, while FootFall said shopper numbers had fallen almost 8 per cent year-on-year.

The pound, which on Monday moved below the 14-year highs it hit last week against the dollar, fell further yesterday as traders absorbed the mixed messages. Sterling was trading at $1.9711, having reached $1.9847 last week, a level not seen since just before Britain was forced to abandon Europe's Exchange Rate Mechanism in 1992.

Further evidence that a two-dollar pound is not a one-way bet came from a stronger-than-expected reading from the US's equivalent to the Cips survey. The Institute of Supply Management said its index of activity in the non-manufacturing sector rose to 58.9 from October's 57.1 and ahead of an average Wall Street consensus of 55.5. Tom Levinson, at ING Financial Markets, said: "This report may give some brief support to the dollar."

Meanwhile, the Bank of England is expected to leave the base rates unchanged tomorrow.