Strong rebound in service sector puts paid to rate cut

The prospect of another interest rate cut this year faded yesterday after an influential survey of the services sector showed a strong rebound last month. The sector includes everything from banks to restaurants and accounts for two-thirds of the economy.

The Chartered Institute of Purchasing and Supply's latest purchasing managers' index (PMI) rose to 56.1 last month - its highest for three months and well above the nine-month low of 55 in September. (The 50-point level divides expansion from contraction.)

The Bank of England's monetary policy committee, which sets interest rates, views the survey as a barometer of the sector. The report was not only stronger than the City had expected, but comes after a week of better data from the manufacturing PMI and housing market. Analysts say the findings mean the MPC is unlikely to lower interest rates from their 4.5% level at its monthly meeting next week.

"The chances of a rate cut in November are receding as fast as the daylight hours," said Andrew McLaughlin, an economist at the Royal Bank of Scotland.

George Buckley, UK economist at Deutsche Bank in London, agreed, saying: "The latest PMI surveys add to evidence suggesting the Bank will, for a third month, keep interest rates unchanged."

However, Mr Buckley thought the MPC might lower its forecasts for growth and inflation in its latest inflation report, due in a couple of weeks. This might lead to another cut in interest rates in the new year. Inflation remains well above the government's 2.5% target - something that will make the committee hesitate over cutting rates.

The CIPS report showed that a rise in new orders was the main reason behind the rebound in the overall PMI index. In particular, the IT and computing, business services, transport and storage sectors reported an improvement in new business.

Other parts of the survey, such as outstanding business and output expectations, were less strong. The latter fell to 72 from 74.8 in September as some firms fretted about the wider economic outlook.

A fall in oil prices led to a fall in input costs for firms, but some managed to push through price rises for their services. The output price index rose to a four-month high of 52.2 - something that will concern the Bank as it looks for any signs that the doubling of oil prices over the past 18 months is feeding into general inflation.

A similar survey of the 12-country euro zone, also released yesterday, showed the services sector growing at its strongest pace for 15 months with the headline PMI index rising to 54.9 from 54.7 in September. Shortly after the survey was released the European Central Bank left its key interest rate on hold at 2%, the level it has been at for more than two years.

But, at a press conference, ECB chief Jean-Claude Trichet argued that the bank needed to maintain its "strong vigilance" against inflation and be ready to raise interest rates at any time.