Rates set to stay on hold after services' growth moderates

Interest rates look certain to stay on hold today after an unexpected moderation in the growth rate of services companies last month raised a question mark over the economic recovery.

The City is unanimous in expecting the Bank of England's rate-setting committee to leave the base rate unchanged at 4.5 per cent.

A snapshot survey of the services sector, which makes up two-thirds of the economy, showed it posted healthy growth for the 39th month in a row.

But a fall in companies' optimism pushed the headline index in June down to 58.7 from 59.2 in May on a scale where a number above 50 demotes growth, the Chartered Institute of Purchasing and Supply (CIPS) said.

It came a day after government statistics showed that the sector stagnated in April because of a slump in output in consumer services companies such as hotels.

"The decline in the services survey in June continues the slightly softer tone to recent service sector indicators," Alan Castle, at Lehman Brothers, said.

However, economists expect the continued growth in the sector will keep the Bank's Monetary Policy Committee (MPC) alert to the risks of inflation over the coming months.

"The services survey will do little to alter the view that interest rates will rise, but probably not in the near term," Howard Archer, the chief UK economist at Global Insight, said.

All of the survey's components were comfortably above the 50 level that divides expansion from contraction, while employment was up at its strongest pace in eight years.

However, fears about inflation and a possible rise in borrowing costs put a slight dampener on optimism about the coming year.

Roy Ayliffe, the director of professional practice at CIPS, said: "Soaring input costs again caused problems for UK service providers, however, and led to lessening degrees of confidence about the future."

Some companies that took part in the survey even expressed concern the industry's success could lead to an increase in interest rates.

All 47 analysts polled by Reuters last week predicted the MPC would leave interest rates at 4.5 per cent when it ends its two-day meeting at noon today.

"We firmly expect the MPC to keep base rates on hold," Philip Shaw, the chief economist at Investec, said.

A number of economists have long been predicting an August rate rise as the Bank, like many central banks around the world, tries to keep inflationary pressures in check.