Buoyant service sector dents hopes for rate cut

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The Independent Online

An unexpectedly healthy increase in service sector activity and high street spending last month have extinguished rekindled hopes that the Bank of England will cut interest rates next week, analysts said yesterday.

A snapshot survey of managers in services companies, which make up two-thirds of the economy, showed that new orders flooded in at the fastest rate for seven months in June. It was the highest jump in the rate of month-on-month growth since November 1999, according to the Chartered Institute of Purchasing and Supply (Cips).

In addition, retail prices surged 1.3 per cent in June, the British Retail Consortium said, at the highest yearly rate since it started its shop prices index in November 1997.

Economists said the data, which were stronger than expected, dashed chances that the Bank's Monetary Policy Committee will cut interest rates next Thursday when it meets for the first time since Mervyn King picked up the reins as Governor. Earlier this week, Mr King had revived hopes of a cut after suggesting that the recent revival in sterling would hit growth. The pound rose to a near six-week high against the euro.

George Buckley, a UK economist, at Deutsche Bank, said: "I think this pushes a rate cut out from July to August. The MPC pays a lot of attention to the [purchasing managers' index], particularly the service sector one, and they may well read into this that things are starting to turn round."

The Cips survey said anecdotal evidence suggested a jump in levels of new business had been the result of improved client confidence following the end of the war in Iraq and the easing of fears about the Sars outbreak. "This survey comfortably beat market expectations, signalling robust growth in the non-retailing part of the service sector. We continue to expect the MPC to leave rates unchanged at next week's meeting," Michele Cook, at Barclays Capital, said. The UK data contrasted to a eurozone survey showing services continued to shrink in June.

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