A surge in growth in the UK's dominant services sector appeared to seal the deal on a rise in interest rates next week but a fall in the prices charged reopened a debate over the need for any further tightening, analysts said yesterday.
A snapshot survey of the sector, which makes up two-thirds of the economy, showed that activity rose to its fastest rate for six months in October.
There was also upbeat news in the US, where an unexpected fall in unemployment triggered a rally in stocks and the dollar on Wall Street.
The index produced by the Chartered Institute of Purchasing and Supply (Cips) jumped to 59.3 last month, one of the highest readings in the survey's 10-year history, from 57.0 in September. Any number over 50 denotes growth.
Economists said that the data had made a rise in borrowing costs to 5 per cent next week a done deal.
"The rate increase is as close to a 'dead cert' as is possible in economic forecasting, with a further rise to 5.25 per cent expected in early 2007," said Richard Snook, an economist at the City analyst firm CEBR.
But there was much less certainty about the Bank of England's next move. A poll of 58 City economists by Reuters showed unanimity for a rate rise next Thursday.
While 13 of the experts forecast a further rise to 5.25 per cent early next year, 28 saw rates unchanged at 5.0 for the whole of 2007 while 19 saw the need for a rate cut later in that year.
"The signals from the domestic and international economy will become more mixed in the coming months, which will dilute the probability of further rate hikes beyond November," said Alan Clarke at BNP Paribas.
The decline in price pressures will provide ammunition for those who are betting on rates peaking at 5 per cent. The Cips index of prices charged dropped to 53.0 - the lowest since February.
"[A rise] is a done deal next week, but we don't expect another hike in the first quarter of 2007," said James Knightley, the UK economist at ING Financial Markets.
In the US the unemployment rate dropped to a five-year low in October as 92,000 jobs were added - less than the 125,000 analysts had forecast - but hiring in the two prior months was revised up, the government said.
The unemployment rate fell in October to 4.4 per cent from 4.6 per cent in September - the lowest unemployment rate since 4.3 per cent in May 2001.
The Dow Jones was up 30 points by noon as traders said the figures showed the US economy was not slowing as rapidly as some had feared. But it later fell back to end 32.5 lower at 11,986.0.Reuse content