Services surge boosts recovery

BRITAIN'S crucial service sector is galloping ahead in the latest sign that the economy is firmly on the road to recovery.

Wiping out any lingering hopes of a cut in interest rates tomorrow, the sector - which accounts for about 70% of the total economy - grew in August at its fastest pace for more than two-and-a-half years. In a further boost, firms hired staff for the first time in two years.

The news came as the Bank of England's monetary policy committee kicked off its latest meeting, with the cost of borrowing widely expected to be held at a 48-year low of 3.5% tomorrow.

The CIPS/Reuters purchasing managers' index, a key barometer of activity in the sector, registered 57 in August, up from 56.6 in July and well above the 50 boom-bust reading. It was the fifth consecutive month of expansion and the fastest rate of growth since January 2001.

'Panellists commented that improved client sentiment [a reflection of strengthening global economic conditions] had been the principal reason behind the new contract gains over the month,' said the report, which also showed the first rise in staffing levels since September 2001.

Alan Castle at Lehman Brothers said: 'Growth will pick up in the second half of the year, closer to trend growth levels. In terms of the rate outlook, this does not change our view that rates will be kept on hold at tomorrow's MPC meeting.'

Stephen Lewis at Monument Securities, said: 'I think 3.5% represents the trough for this cycle.'

Record household debt and signs the housing markets has sprung back to life are also expected to prevent a rate reduction tomorrow. But experts said it is too early for the MPC to start raising rates again.

John Butler at HSBC said: 'A rate hike would be a huge shock, and one that may cause the consumer to retrench and hence open the Bank to criticism.'

Meanwhile, the Centre for Economics and Business said growth in London's economy is poised to outstrip the national average this year thanks to a fightback in the City and the business services sector.

The think-tank sees the capital-growing by 2.3% this year rather than the 1.6% pencilled in three months ago. The new forecast is well above the 1.8% most economists have predicted for Britain as a whole.

London's stock market was in buoyant mood today, rising to within a whisker of its highest this year. The FTSE 100 index was up 68.5 points to 4272.9.