Growth in service sector surpasses predictions

The Markit/CIPS services PMI index, a measure of activity growth as reported by purchasing managers, surged to a 13-month high of 57.1 in March from an unrevised 52.6 in February, beating even the most optimistic analyst’s forecast.

Sterling strengthened by more than half a cent against the dollar and gilt futures extended losses to hit a session low, underperforming German government bonds, as investors priced in a greater chance of an early Bank of England rate rise.

“When you look at where the Bank of England has typically raised interest rates in the past, the average level of the PMI is not that much different to where it stands right now, so it is consistent with higher rates,” said Deutsche Bank economist George Buckley.

There is a question mark over the sustainability of the increase, however, as some firms reported benefiting from a spurt of public spending in March, the end of the last fiscal year before big government spending cuts begin in earnest.

The 4.5 point rise in the index is the second-biggest increase since the survey started in 1996, and was only exceeded in January this year, when activity rebounded strongly after contracting due to December’s unusually heavy snow.

Data company Markit said that based on March’s figures it estimates that British GDP grew 0.8 per cent in the first quarter of the year, up from a 0.5 per cent forecast after February’s PMI data for the services, manufacturing and construction sectors.

The strength of first-quarter GDP is seen by most economists as the key to whether the Bank raises interest rates in May from a record low of 0.5 per cent.

Three of the nine members of the Bank’s Monetary Policy Committee supported a rate rise in March, but the others worried that Q4’s shock GDP contraction could mark the start of an extended period of sub-par growth.

Economists cautioned against expecting a rise in interest rates at tomorrow’s Bank meeting.

They contrasted the strength of the PMI with the weaker picture painted by a quarterly survey from the British Chambers of Commerce released earlier on Tuesday.