Rate cut hopes defy services burst

THE CITY is clinging to its hope that the Bank of England will today deliver its sixth interest-rate cut in seven months, despite an unexpected burst of activity in the services sector.

The rate cut speculation helped the FTSE 100 stock index to surge by 57.9 points yesterday to close at a new record high of 6,473.2. The index also set a new intra-day record of 6,496.1.

City analysts said that recent evidence of weakness in the real economy - rising unemployment, slower growth and inflation below target - would persuade the Bank's Monetary Policy Committee (MPC) to cut interest rates by a quarter-point to 5.25 per cent.

Figures released by the National Institute of Economic and Social Research, which showed UK growth grinding to a halt in the first quarter of the year, further backed the case for a rate cut.

The MPC, which announces its rate decision at midday today, is thought unlikely to plump for a half-point reduction following recent optimistic economic surveys. Analysts believe the survey evidence could dissuade the Bank from further rate cuts later in the year, and the pound rose by more than a cent from Tuesday's 18-month low against the dollar.

The Chartered Institute of Purchasing Supply (CIPS) study of UK services, out yesterday, was the latest to surprise on the upside. The CIPS index of business activity surged from 49.5 in February to 53.0 in March, suggesting that the service sector had expanded for the first time in five months.

There was also better news from the manufacturing sector, where activity declined by a smaller-than-expected 0.1 per cent in February.

Overall, UK industrial production - which includes manufacturing, mining and quarrying - rose by 0.1 per cent, according to Office for National Statistics figures.

A separate study by the Engineering Employers' Federation, however, pointed to further falls in engineering output in the months ahead.