Service sector growth hits hopes of rate cut

Any lingering hopes the Bank of England would cut interest rates tomorrow faded as new figures yesterday showed that the services sector and the high street enjoyed strong growth last month, pointing to a broad economic recovery.

Services companies enjoyed their fastest growth in eight months in February. The Chartered Institute of Purchasing and Supply said the rise was a "significant turnaround" from the fall in growth in the wake of 11 September. Meanwhile, spending on the high street beat retailers' expectations in February, said a report from the CBI, the employers' group.

All but one of 25 economists polled by Reuters believe rates will be held at their 38-year low of 4.0 per cent when the Monetary Policy Committee meets today and tomorrow.

But industry groups called on the Bank to cut rates despite admitting there were "tentative" signs of an end to the manufacturing recession. The Engineering Employers' Federation said a quarter-point cut was vital if the sector was to mount a sustained recovery.

Stephen Radley, the EEF's chief economist, said despite the upturn in confidence, manufacturers were under severe pressure to cut prices, jobs and investment. "A cut in interest rates and action in the Budget to reduce cost pressures and stimulate higher investment are needed to turn the recent easing of manufacturing decline into a firm recovery," he said.

The EEF said its latest survey showed engineers were "cautiously optimistic" that orders and output would rise over the coming months. "There is definitely something of a change of mood," Mr Radley said.

The survey echoed the findings of the authoritative survey of purchasing managers last Friday that showed manufacturing enjoyed its first month of growth for a year in February.