By Christina Fincher
LONDON, March 5 (Reuters) – Growth in Britain’s service sector picked up to its fastest pace in five months in February and inflation pressures surged at their strongest in at least 12 years, a survey showed on Wednesday.
Sterling rose and gilts fell as the surprising resilience of the sector reinforced expectations the Bank of England would keep interest rates on hold when it meets this week and cut them only gradually thereafter. The Chartered Institute of Purchasing and Supply/NTC said its activity index for the services industry, which ranges from airlines to banks, rose for a third month to 54.0 in February from 52.5 in January, the strongest since September.
Analysts had forecast the index would fall to 52.1. Any reading above 50 indicates expansion.
“The rise in business activity is welcome and suggests the economy as a whole had a little bit more momentum behind it,” said Philip Shaw, chief economist at Investec.
“It not only reinforces the likelihood of no change at tomorrow’s meeting, it also has implications for the outlook for rates further out.
Britain’s services sector, which accounts for around three quarters of the economy, has grown every month for nearly five years although the pace slowed sharply towards the end of last year.
Euro zone services growth also staged a comeback in February as a buoyant France and recovering Germany offset a further contraction in Italy and Spain.
PRICE PRESSURES
The Bank of England cut interest rates in February for the second time in three months to shore up the economy but remains concerned about the inflation outlook.
Consumer price inflation has been running above the Bank’s two percent target since October and Bank Governor Mervyn King has indicated he expects it to rise close to three percent before long.
Bank policymakers will announce the outcome of this month’s meeting at midday on Thursday and are almost certain to leave rates unchanged at 5.25 percent.
Wednesday’s survey showed higher food and energy prices were raising firms’ costs. It also showed firms were being successful in passing on the bulk of these costs to customers.
The input price index rose to 65.6 last month from 63.8 in January while the prices charged index rose to 56.8 from 55.3. Both readings for February were the highest since the series began in July 1996.
The figures tally with official data which shows producer price inflation running at its fastest rate in more than 16 years.
“It’s consistent with what the Bank of England have been saying that growth is slowing but only slowing and near-term inflation pressures are still a concern,” said Peter Newland at Lehman Brothers.
