Services growth strengthens case for holding rates

Britain's services sector grew for the ninth month running in December, reinforcing expectations that the Bank of England will hold interest rates this week.

Although December's expansion in the service sector was less than November's six-and-a-half year high, the latest services sector data from the Chartered Institute of Purchasing and Supply (CIPS) underscored the continuing strength of services in the UK economy.

The CIPS said the data confirmed the "impressive turnaround" in the performance of the sector in the second half of 2003. The upturn follows a period of subdued growth at the start of last year because of the Iraq war and the outbreak of the Sars virus.

The purchasing managers index from the CIPS stood at 58.5 in December against 59.6 the month before. Any score above 50 in the closely watched index signals growth.

The Bank of England's monetary policy committee (MPC) meeting on Thursday is expected by most analysts to keep interest rates at 3.75% for the second month running to see how its November decision to raise the costs of borrowing affected consumers.

"We still feel interest rates will remain on hold at this week's MPC meeting," Philip Shaw, of Investec, told Reuters. "But the overall pace of the economy should result in rates rising in February, particularly given the strong growth in house prices in December."

Halifax today reported that house prices rose by 1.8% during December and ended 2003 15.4% higher than the previous year. The persistent strength of the housing market has been a concern for the Bank for some time, accounting in large part for its decision to raise rates by 0.25% in November, the first rise in almost four years. But the strong bounce in prices in December showed that the move had little impact.

Most analysts see rates rising as high as 5% by the end of the year, which is expected to take the steam out of the housing market. Halifax predicts that house price inflation will continue to increase in 2004, but expects increases to slow to 8%.

Nationwide is forecasting house price inflation of 9% for 2004, although it expects most of the growth to come during the early part of the year, before rising mortgage rates and slow income growth dampen confidence.