Services boom revives interest-rate concerns

NEW EVIDENCE yesterday of continued strong growth in UK services rekindled interest-rate fears ahead of today's Monetary Policy Committee (MPC) decision.

The Chartered Institute of Purchasing & Supply (CIPS) said levels of both new business and employment continued to rise in the UK services sector in July, although there were signs of a slowdown in growth.

Separate data on industrial production painted a better-than-expected picture of UK manufacturing. Manufacturing output stabilised in June and the sector is now out of recession, at least from a technical standpoint

Economists define recession as two consecutive quarters of negative growth in gross domestic product (GDP). Manufacturing GDP declined in the last quarter of 1997 and the first of 1998, putting the sector into recession. However, manufacturing GDP grew by 0.1 per cent in the second quarter of this year, according to yesterday's figures.

However, experts dismissed the numbers as a "false dawn". David Hillier at Barclays Capital said: "The sharp deterioration in both the CBI and the CIPS survey [two recent surveys of UK manufacturing] in recent months suggest that output will fall significantly in the third quarter."

Michael Saunders at Salomon Smith Barney said: "It is probably too early for the collapse shown in the manufacturing surveys in May, June and July to be fully reflected in the official output data."

Yesterday's CIPS survey of services found that the index of business activity weakened to 55.9 in July from 56.8 in June, the weakest growth in activity since the survey began two years ago. However, CIPS said the sector was still growing - an index above 50 implies expansion - and noted that companies in some areas were experiencing staff shortages.

There was a further marked rise in wages and salaries in UK services, seen by some City economists as further evidence that growth in the sector continues to run above trend.

The strong services survey rekindled concerns that the MPC could today announce another rise in interest rates, although most in the City thought the committee was more likely to keep rates on hold. "Rates on hold, but only just," said economists at ABN Amro.

The Institute of Directors (IOD) yesterday pleaded with the MPC not to raise rates again. John Redwood, shadow trade and industry spokesman, said the MPC should ask the Chancellor to change policies.

Sterling closed at DM2.899, just up on the day but a pfennig down on yesterday's close.