Skill shortages highlight Bank's rates dilemma

Signs point both ways on interest rates as booming services industry contrasts sharply with slump in retail sector on day of MPC meeting
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The Independent Online
FRESH signs that the pace of activity picked up in service industries such as finance and communications last month piled on the interest rate agony yesterday, as the Bank of England's Monetary Policy Committee (MPC) started its two-day meeting.

Conflicting signals from services and manufacturing mean experts are uncertain whether or not to expect an increase in the cost of borrowing from the current rate of 7.25 per cent when the Committee makes its announcement at midday today.

Kevin Darlington, an economist at ABN-Amro, said the extremely buoyant survey of the service sector was probably not enough by itself to sway today's decision. But he added: "If it is a portent of faster GDP growth, we can expect a rate rise in the next two to three months."

On the other hand, Francesca Massone at Goldman Sachs predicted a quarter point rise today.

The MPC's vote was split five to three in favour of leaving rates unchanged in January, and is believed to have been divided on the same lines in February. Analysts fully expect another split this month in the face of the dilemma posed by Britain's two-speed economy, but are not sure whether any members will have changed sides.

Industry's case for leaving rates alone was pressed yesterday by Margaret Beckett, President of the Board of Trade. In a radio interview she said: "The position is one where people have got some concerns and there are some manufacturers who are feeling the pinch."

However, the survey from the Chartered Institute of Purchasing and Supply (CIPS) showed the pace of growth in services picking up to a seven-month high in February. An increase in the activity index from 59.0 to 60.7 - both well above the 50 "breakeven" level - was driven by a surge in new business.

Employment rose, but not by enough to prevent an increase in the backlog of outstanding business. Companies said the limit on recruitment was skill shortages, which made it difficult to replace staff who left.

As a result, costs - mainly salaries - increased, with one in five respondents reporting an increase during the month compared with only 4 per cent reporting a decline. Prices charged rose too, and at a faster rate than the previous month, although they have been growing at a slower pace than costs.

Peter Thomson, director-general of the CIPS, said the buoyancy applied across the service industries (although the survey excludes retailing). Skill shortages were most severe in IT.

"The pressure is greatest in a narrow range of skills. Those people can virtually write their own salary cheques," he said.

Manpower, the employment services agency which is one of the UK's biggest employers, confirmed this picture of shortages. As well as the computer industry, there was also near-saturation of the jobs market for staff at call centres and telemarketing operations in some areas.

But Tony Hoskins of Manpower added that, aside from retailing - where demand for staff was slacking off, there was general buoyancy of demand. "I would say manufacturing remains strong almost despite the pound," he said.

The CIPS survey covers 500 businesses in five sectors: hotels and restaurants, transport and communications, finance, information technology, business services and personal services. In total, these account for about a third of national output, compared with manufacturing's 23 per cent share.

The strong pound has kept manufacturing in the doldrums. According to the latest official figures, two broad categories of services - transport and communication and business services and finance - grew by 6.5 and 7.6 per cent respectively last year. Manufacturing output, by contrast, expanded just 1.6 per cent and has slowed further.

In the retail sector, yesterday brought warnings of a sales slowdown from three furniture and carpet businesses, Carpetright, DFS and MFI. Retailing, excluded from the CIPS survey, has enjoyed strong volume growth according to official figures, but this can be explained partly by price discounting.