UK services still booming

PROSPECTS for interest rates in the UK were no clearer after fresh evidence yesterday that the service sector of the economy expanded vigorously in March. In the latest survey, businesses reported a pick-up in new business, a growing backlog of work, shortages of skilled and unskilled staff and higher wages.

With this confirmation of a dual economy - booming services and limping manufacturing - the Bank of England's Monetary Policy Committee still faces a tough dilemma when it meets next week. Official figures for industrial output due on Monday are expected to confirm this pattern.

City experts expect the decision on Thursday to hinge, once again, on the vote of Eddie George. The minutes of February's meeting, the latest published, showed the Governor's casting vote to have been decisive in keeping rates unchanged at 7.25 per cent.

Yesterday's survey of services by the Chartered Institute of Purchasing and Supply showed buoyant activity, with the index at 60.3, a fraction lower than February but well above the 50 "boom-bust" watershed.

New business and the backlog of work increased, at a slightly slower pace than the previous month, while employment and prices rose at a faster rate. A third of all firms said they had more new business, and blamed their inability to meet current demand on staff shortages.

Respondents said they had to offer higher pay to attract new staff and retain existing staff, with the result that costs rose sharply for the 21st month running. The one negative note came from a sharp fall in optimism about future prospects.

Kevin Darlington, an economist at ABN Amro, said: "This survey is unlikely to tip the balance at next week's MPC meeting, but if it heralds firmer GDP growth in the first quarter or higher underlying pay growth, we might only have to wait until May for the next rate rise."