Rate hope as competition stymies service sector firms

Stiff competition is preventing service sector firms from raising prices, a survey shows today, raising hopes that the Bank of England will keep interest rates on hold when its monetary policy committee meets this week.

Firms in the sector are facing heavy pressure on their margins, according to the Confederation of British Industry. "There is little sign of service sector inflation, although profits are being squeezed as cost pressures are felt," said Sudhir Junankar, the CBI's associate director of economic analysis.

"With competition strong, companies may not get the prices rises they expect, therefore interest rates can be kept on hold."

Meanwhile a separate survey showed that the level of wage settlements has fallen since a year ago, a further sign that inflationary pressures in the economy are easing. Two thirds of pay deals so far this year have been between 2% and 3.5%, according to Incomes Data Services.

The Bank's monetary policy committee has been concerned about the official figures for average earnings which jumped last month. However Alastair Hatchett of IDS said the earnings figures had been boosted by exceptional Christmas bonuses.

The CBI survey showed service sector firms are still recruiting, but at a slower pace than three months ago. "Consumer firms expect a further slowdown, while business and professional firms expect more rapid job creation," the CBI said.

The monetary policy committee will announce its decision on interest rates on Thursday.