Faster expansion in services sector puts interest rate rise in the spotlight again

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THE COUNTRY’S dominant services sector expanded faster than expected in May and hiring matched a 17-year high, according to a survey published yesterday that could add to debate at the Bank of England about when to raise interest rates.

The Markit/CIPS services purchasing managers’ index (PMI) ticked down to 58.6 in May from 58.7 in April, which was its strongest reading in 2014 so far.

Economists in a Reuters poll had expected a reading of 58.2 in May, still well above the 50 mark that denotes growth.

Britain’s economy posted its fastest annual growth in more than six years in the first quarter and is expected to grow about 3 per cent in 2014, outpacing other big, industrialised nations.

Markit chief economist Chris Williamson said the economy looked set to grow again by 0.8 per cent in the second quarter, finally pushing it back above its size before the financial crisis in 2008.

“With every strong PMI reading, the more lively the discussion will become among the Bank of England’s Monetary Policy Committee that a pre-emptive early hike in interest rates is warranted,” Mr Williamson said.

There were signs of higher wage growth in the services sector PMI, which led to the sharpest rise in operating costs for four months.

But overall inflation pressure looked subdued. “The chances are that the Bank of England will keep its foot firmly on the accelerator pedal to help keep the economy booming,” Mr Williamson said.

The BoE’s interest rate-setting committee met yesterday and was sitting again today.

Markets expect a first rate hike only in 2015 but some economists see a growing chance of a move in late 2014.

A composite index combining PMIs for manufacturing and construction, plus the services sector, showed growth in output across the economy eased slightly to 59.1 in May from 59.4 in April.