Healthy economy makes rate cut unlikely

The prospect of a cut in interest rates all but vanished today, as the service sector expanded at the fastest rate for over a year, while industrial output also showed healthy gains.

Industrial output rose by 0.7% in June from the previous month, the office for national statistics (ONS) reported, as high summer temperatures boosted demand for electricity.

A 7.8% rise in electricity output accounted for the biggest gain in overall production as Britain sweltered in the hottest June since 1976. Hot weather also boosted demand for electricity in Europe, with Britain making net exports of electricity for the first time ever.

Industrial output rose 2.2% for the year, the strongest gain since July 2002. Within that figure, manufacturing production rose 0.2% in June, as was expected. This was the sharpest annual rise in the battered manufacturing sector since December 1994, but the rate was distorted upwards by extended shutdowns during the jubilee holidays.

Other data showed a sharp July rise in services output, which expanded at its fastest pace for a year. Growing optimism about the economy, and robust levels of new business boosted the Chartered Institute of Purchasing and Supply's service sector activity index to 56.6 from 54.5 in June, the highest since May 2002.

"Overall, an encouraging set of data, providing further evidence of steady recovery," Ross Walker, an economist at RBS Financial Markets, told Reuters. "It weighs against a rate cut in August and will bolster market expectations that the next move in the UK rates will be up."

The Bank of England's monetary policy committee is due to announce its interest rate decision on Thursday. After its surprise cut in July, few expected the Bank to ease the cost of borrowing again so soon and today's figures, along with other recent data, virtually rule out a cut.

Recent figures showed a boom in retail sales, with consumers piling up a record ?10bn of debt in June. Earlier, the Halifax Bank, Britain's largest lender, said that house prices rose by 1.3% in July, accelerating after interest rates were cut to a 48-year low of 3.5% last month.

The monthly rise in property prices was faster than the 0.6% gain in June, defying expectations of a slowdown in the housing market. Strong domestic demand, coupled with weak manufacturing, has prompted analysts to warn about Britain's two-speed economy.

"If, like us, you are worried about the unbalanced nature of the economy, then come September you will be petrified," John Butler, UK economist with HSBC said in a research note.