Rise in High Street spending dashes hopes of a rate cut

A healthy increase in both service sector activity and high street spending has extinguished lingering hopes of a cut in interest rates this afternoon, 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 last month.

It was the first increase in new business since the start of the year, according to the Chartered Institute of Purchasing and Supply (CIPS). Firms' optimism hit a nine-month high.

In addition, retail sales rose at their fastest pace for six months in May, the Confederation of British Industry said.

The surveys were stronger than had been expected and both organisations said the end of uncertainty surrounding the Iraqi war had released a huge volume of deferred demand.

Gilt yields and sterling rates rose as investors scaled back their rate-cut expectations. "There is little chance they are going to cut interest rates," Peter Dixon, an economist at Commerzbank, said.

The upbeat data contrasted sharply with another substantial decline in the output of services firms in the 12 nations of the eurozone, which added further weight to the need for a rate cut by the European Central Bank later this morning.

Economists in the City believe today's decision at the Bank of England will be close in the wake of May's decision when the Monetary Policy Committee was split by five votes to four. Many believe the 10 per cent fall in the value of sterling this year and the 5 per cent rise on the London stock market will prompt the committee to keep rates at 3.75 per cent.

But many analysts believe that will be a postponement rather than a cancellation. "We believe monetary easing will come eventually," Bank of America's Lorenzo Codogno said.

CIPS said its survey showed optimism has risen on the back of the easing of geopolitical tensions and anticipation of success of new product lines and investment in advertising.