Growth in services points to rate rises next year

Service sector firms, the main engine of the economy, expanded at their fastest pace for more than six years in November, the latest snapshot of the sector showed yesterday. The surge points to increases in the cost of borrowing although few City economists expect the Bank of England to change rates at its meeting today.

"This shows the service sector is gathering momentum and the rate rise at the beginning of the month does not seem to have dented activity at all," said Philip Shaw at Investec. "We think the monetary policy committee is firmly on hold, but with more evidence of an accelerating economy, it still looks likely to raise rates early next year."

Firms across a variety of sectors reported stronger trading conditions, according to the survey conducted by the Chartered Institute of Purchasing and Supply. "As confidence continues to improve, growth of business activity in the UK private sector services economy reached the highest levels since July 1997 mainly as a result of a continued increase in levels of new business," said Roy Ayliffe, its director of professional practice.

The CIPS main activity index rose to 59.6 in November, up from October's 59.1 and its best reading since June 1997. It surpassed market forecasts of 59.0. The news follows the CIPS survey for manufacturing earlier this week, which signalled the fastest pace of growth in the sector since December 1999.

Vicky Redwood of Capital Economics said the strong reading from the services sector pointed to growth of just over 1% in the final quarter of the year, which could pick up to 1.3% in the first three months of next year. "This is good news not just for service sector firms but for economic growth as a whole," she said.

But with household debt at record levels, the MPC is expected to proceed cautiously with further rate rises, after hitting consumers with the first one in four years last month. In the six years since the chancellor Gordon Brown put the Bank in charge of setting rates, it has never made a change at a December meeting. "Back-to-back hikes would be a big surprise," said Alan Castle, UK economist at Lehman Brothers.