Rate-rise prospects 'killed off'

THE City today all but ruled out a rise in interest rates when the Bank of England meets next week following news of a surprise slowdown in the dominant services sector.

The closely-watched purchasing managers' report from the Chartered Institute of Purchasing and Supply showed service sector growth slowed in February and business confidence fell to a 20-month low.

Its headline business activity index registered 55.1 against 55.9 in January. Although well above the 50 'boom-bust' level, the fall contrasts with a recent run of unexpectedly good data.

The survey revealed incoming new business eased during the month. Concerns about strong competition and squeezed margins sent confidence tumbling to its lowest since June 2003.

Deutsche Bank economist George Buckley said the average index across all CIPS reports this week - manufacturing, construction and services - was 54.4. He said the lowest level at which the Bank had raised rates was 55.5, adding: 'We firmly believe rates are on hold and expectations of a near-term hike are overdone.'

John Butler, economist at HSBC, said of today's report: 'If the monetary policy committee is looking for information to hang a rate hike on, then this is not it.'

Rising inflation, a bounce in consumer credit and signs that the housing market has bottomed out had sparked speculation that Bank of England Governor Mervyn King and his monetary policy committe are set to lift rates for the first time since last August.