MPC set to keep rates unchanged

THE Bank of England is firmly expected to leave interest rates unchanged at 7.25 per cent today, at the end of its Monetary Policy Committee's monthly meeting.

Signs from a survey published yesterday that the ultra-strong growth in service industries might be abating encouraged many City analysts to believe the danger of a further rate rise has now passed. Only two or three of the nine MPC members are believed to still favour raising the cost of borrowing to ensure growth slows far enough and fast enough, although minutes of this week's meeting will not be published until mid- July.

The pound weakened slightly yesterday in reaction, ending down more than 1.5 pfennigs at DM2.90. But it has remained in a narrow range - 5 per cent below its peak - for the past three weeks.

Yesterday's survey of services from the Chartered Institute of Purchasing and Supply showed that the expansion in activity last month remained robust. The index stood at 56.9, well above the "boom-bust" dividing line of 50, but down from 59.1 in April.

All the components bar one showed a strong rise but at a slightly slower pace. The key indicator for new business, equivalent to new orders in manu- facturing, slipped to 55.4, its third fall in a row. The CIPS said the strong pound was now starting to damage the competitiveness of service companies.

The exception was employment, which rose even faster than the previous month. There was an increase in all sectors, with the biggest in IT and computing where demand for Year 2000 and Euro-related projects is keeping demand for staff high.

The general skill shortages kept companies' costs increasing at a rapid clip, only slightly lower last month than in April. The report said companies across the service industries blamed pay pressures on the tightness of the jobs market.

The survey contained enough ominous detail to worry strict hawks. Richard Iley, at ABN-Amro, said that if wage rises accelerated it would be impossible to rule out an interest rate rise later in the year. But the overall signs of slowdown confirmed most City analysts in their view that the economy is on course for a soft landing.

John O'Sullivan, at Greenwich NatWest, said: "The weakness of this survey should reassure those MPC members who have expressed concern about the relative buoyancy of the service sector."