Sterling slips as rate fear recedes

THE BANK of England's Monetary Policy Committee is expected to leave interest rates unchanged at the end of its two-day meeting today, with many analysts increasingly confident that there will be no further rises in the cost of borrowing.

This view held sway on the foreign exchanges, where the pound fell again. It ended down almost a pfennig at DM2.933.

There was some caution, however, as the MPC's meeting comes just ahead of next week's quarterly Inflation Report. The Bank has been considering publishing two inflation forecasts, reflecting the gap between hawks and doves on the committee over the risk of a sudden fall in the pound which could push inflation above its 2.5 per cent target.

The MPC vote was spilt four-four in March, with Eddie George, Governor of the Bank of England, using his casting vote to leave rates unchanged. Minutes of April's meeting will be published next week, but according to unconfirmed reports one of the hawks, Charles Goodhart, switched to make it a five-three vote for no change.

A survey yesterday suggesting a slight slowdown in activity in the service industries was seen as no threat to hopes that this month will also bring no move on rates, even though it showed that services were continuing to expand very rapidly. The index from the Chartered Institute of Purchasing and Supply survey of purchasing managers fell to 59.1 in April from 60.3 the previous month.

Peter Thomson, director general of CIPS, said home demand was still very strong. "The service sector, with less exposure to the exchange rate and international competition, is enjoying the benefits of the UK market."

The modest slowdown during the month was mainly due to slower growth in new business, down from 59.7 to 57.2 in April. Mainly due to the strong pound hitting overseas demand, this was the slowest expansion since October.

However, demand remained at a high level, with more than one in four firms reporting an increase in new business. This was twice as many as reported a decrease.

The pace of growth of employment dropped last month too, but this was due to skill shortages rather than redundancies, according to the survey. Skill shortages led to inflationary pressure on wages and salaries, especially for computer and IT companies. More than one in five companies said their average costs were on the increase, six times as many as reported a decline in costs.

This took the costs component of the index up from 58.2 to 58.9, its highest level for a year. One in 10 companies raised the prices they charged customers as a result of passing on higher costs.

Optimism in the service sector picked up last month after its recent dent from the strong pound and the Asian crisis. Almost 60 per cent of the companies surveyed expect their business to grow during the next 12 months.

The survey confirmed the contrast between the health of services and home demand and the weakness of manufacturers dependent on exports. Stephen Hannah, chief economist at IBJ International, said: "We will see some weakness in the manufacturing sector filter through to services as the year progresses, but it is a fairly slow-grinding process."

Some City economists remained concerned about rising wage costs, saying these might yet force the Bank of England into raising interest rates at some point. Ciaran Barr of Deutsche Morgan Grenfell said: "I do not think this is the start of a major downturn in the service sector."