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Sunday 06th of March 2011
March 4, 2011    

Interest rate hike to be delayed after services data

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by Kay Murchie

According to economists, yesterday’s services sector figures could result in the delay of interest rate hikes.

Growth in the UK’s closely-watched service sector slowed in February, figures revealed yesterday.

The sector accounts for around 75% of Britain’s economic output.

The Chartered Institute of Purchasing and Supply (CIPS)/Markit purchasing managers’ index (PMI) fell to 52.6 in February from January’s eight month high of 54.5.

Economists believe the data could be a “game changer” and could put the first interest rate rise on hold for some time.

Many had forecast an interest rate rise as early as May - in a bid to tame stubbornly high inflation.

Consumer Price Inflation (CPI) rose to an annual rate of 4% in January – the highest rate since November 2008.

The latest figures takes inflation to double the Government’s target of 2% – where it has been for more than a year.

However, the Bank has said inflationary pressures are arising from either external forces such as commodity prices, or temporary domestic factors such as the recent VAT hike, and inflation is expected to fall below the 3% mark in a year’s time and will eventually fall back to target but the timescale is uncertain.

In the meantime, further evidence of a cautious approach to interest rates comes after Charlie Bean, deputy governor of the Bank of England said: “The risk of inflation staying above target into the medium term needs to be weighed against the downside risk to growth.”

The economy contracted by 0.6% in the October to December period - with the shock fall attributed to bad weather.

The figures, however, have presented the Monetary Policy Committee (MPC) with a dilemma. Despite pressure to lift interest rates to combat inflation, the central bank said it is reluctant at this stage to lift rates when the recovery is losing momentum.

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