Opinion split on rate rise despite service sector's growth

Pressure for an early rise in interest rates grew yesterday as a closely-watched survey showed Britain's dominant services sector expanding at its fastest pace in eight months in January.

The latest services purchasing managers' index (PMI) - where a reading above 50 indicates growth - rose to 54.5 last month from a 20-month low of 49.7 in December, helped by a recovery in orders following the pre-Christmas snow.

It comes in the wake of upbeat manufacturing and construction PMIs earlier this week, narrowing the odds that the UK will avoid a double-dip recession.

Yesterday's report showed that the services sector - which accounts for more than two-thirds of GDP - still faces challenges as input cost inflation recorded its sharpest rise since the survey began, hinging at further price rises on the way to consumers.

Many economists see the Bank of England having to raise interest rates later this year to tackle stubbornly high inflation and are debating whether it could come as early as next week.

Howard Archer, chief UK economist at IHS Global Insight, said: "The marked rebound in services activity increases the possibility that the Bank of England will raise interest rates sooner rather than later, especially as the survey shows rising input and output prices.

"Indeed, a move at the end of February's policy meeting next Thursday cannot be ruled out. However, we believe it is still most likely that most members would like to hold fire for now."

George Buckley of Deutsche Bank added: "I still think the Bank is going to want to see more than just this. They might want to see, for example, what happens after this volatility between December and January.

"I don't think the Bank will go in February, but I think it is obviously a risk."

Interest rates have been at an historic low of 0.5 per cent for almost two years.