Buoyant services sector spells rate rise

Britain's services sector grew at its fastest pace in over six years while house prices also picked up, figures showed today, bolstering expectations of a rise in interest rates.

A report from the Chartered Institute of Purchasing and Supply (CIPS), showed that services, which account for about two thirds of the British economy, rose to 59.8 in January from 58.5 in December. A reading above 50 signifies expansion.

This was the fastest rate of growth since June 1997 and will reinforce already growing expectations that the Bank of England's monetary policy committee (MPC) will raise the cost of borrowing by 0.25% to 4% tomorrow.

"The figures, taken together with new figures from the Halifax suggesting continuing strength in the housing market, will have increased the resolve of the monetary policy committee to increase base rates at its meeting today and tomorrow," said Ian Mitchell, senior economist at the Centre for Economics and Business Research.

In the latest survey on the housing market, Halifax bank said house prices surged last month at their fastest rate since October 2002. The country's largest mortgage lender said prices jumped by 2.2% in January after a revised 2% gain in December.

Further evidence of a robust economy came from yesterday's monthly snapshot of almost 250 retailers conducted by the Confederation of British Industry, which showed that business last month was far brisker than stores had been expecting and was well above average for the time of year.

The CIPS report on the services sector, based on a survey of around 700 firms, attributed the robust growth in activity to further improvement in business confidence and strong gains in new work over the month. Companies said previously deferred projects had been restarted and new services lines had been introduced to the market last month.

"It's a very broad recovery across main sectors. In particular, IT companies and business services providers are doing very well," Chris Williamson, head of economics at NTC Research told Reuters.

Even if the Bank's monetary policy committee raises interest rates tomorrow as analysts expect, the service sector is likely to withstand higher borrowing costs, Mr Williamson said.

"It [a rate hike] will have an impact, certainly on the consumer sector, but we don't think it will be anything that will take a steam out of the momentum that we've got here. The recovery is broad-based and has a very strong foundation," he said.

Expectations of a rise in interest rates have been building up over the past few weeks amid a welter of evidence of a pickup in economic activity. Growth in the fourth quarter of last year was stronger than expected and Britain's battered manufacturing sector is finally showing signs of bouncing back, leading the CBI to declare the long slump in manufacturing over.

The government last night declared its support for another rise in rates when Ed Balls, Gordon Brown's chief economic adviser, said a pre-emptive strike was needed to maintain economic stability.

Last month, only one of nine MPC members - deputy governor Sir Andrew Large - voted to raise rates. The majority preferred to wait to see the fallout from November's quarter-point increase.

Despite expectations of an upward move tomorrow, inflation remains well below the Treasury target of 2%. In January, inflation stayed steady at 1.3%.