Should Osborne pump billions more into economy? Surge in services sector gives rate-setters a QE headache

A surprise surge for Britain’s services firms gave Bank of England rate-setters a huge headache today ahead of a crucial decision on whether to pump billions more into the recovery.

The Chartered Institute of Purchasing & Supply’s February survey reported the strongest growth in five months for  a sector spanning from IT and accountancy to hairdressers and restaurants.

Its activity index, where a score over 50 signals growth, improved to 51.8. Firms won new work at the quickest pace since last May and confidence hit a nine-month high.

Analysts had been braced for more bad news after disappointing updates from manufacturers and builders, potentially tipping the monetary policy committee into voting to extend its £375 billion quantitative easing programme on Thursday.

Governor Sir Mervyn King is one of three rate-setters calling for more action as Italy’s inconclusive election and the onset of “sequestration”, automatic spending cuts in the United States which kicked in on Friday,  darken the global backdrop.

Deutsche Bank chief UK economist George Buckley said: “The chance of more QE this week has probably diminished a little. Still, with the economic recovery having remained muted and Italy’s election result raising euro fears again we cannot completely dismiss the risk for further stimulus on Thursday.”

The MPC is ignoring inflation, above its target at 2.7%, for now although the sluggish start to its Funding for Lending initiative will also give the committee food for thought. Lending contracted by £2.4 billion in the second half of last year, figures showed yesterday. Cips said its surveys signalled 0.1% growth in the first quarter of 2013, leaving the UK avoiding a triple-dip recession by a narrow margin. But chief executive David Noble said the improvement among services firms “suggests we might be heading in the right direction at last”. Retailers also saw the strongest growth for three years in February, according to the British Retail Consortium.

Royal Bank of Scotland analyst Ross Walker said: “With stock markets rallying, 10-year gilt yields holding below 2% and trade-weighted sterling down 6% since the start of this year, it is difficult to see what is the pressing need for a QE extension this week.”