UPDATE 1-UK services hit 2014 high, house prices in focus

Tue May 6, 2014 6:32am EDT

Related Topics

(Adds economist comments, sterling reaction)

By William Schomberg

LONDON May 6 (Reuters) - Britain's dominant services sector grew in April at its fastest pace so far this year, suggesting the broader economy is picking up more speed and raising questions about the Bank of England's determination not to raise interest rates any time soon.

The pound jumped to its highest level against the dollar in nearly five years after the Markit/CIPS survey came in much stronger than economists had expected and showed companies were hiring aggressively.

"All the signs are that Britain is booming," said Michael Saunders, an economist with Citi in London.

"The need for the current ultra-loose policy stance is receding rapidly, in our view. Indeed, the current policy stance may well - if sustained for much longer - start to create a dangerous bubble mentality in housing and other assets."

The Organisation for Economic Co-operation and Development also voiced its concern about Britain's rising house prices, calling for more action to prevent a bubble.

The Bank of England holds a monthly rate-setting meeting on Wednesday and Thursday. It is widely expected to start raising borrowing costs only next year as it allows Britain's recovery to build.

But a top BoE official last week raised expectations that the Bank could take other steps as soon as next month in response to the rise in house prices which reached nearly 11 percent last month.

The Markit/CIPS services purchasing managers' index (PMI)rose to 58.7 in April from 57.6 in March, far above the 50 threshold for growth.

Economists taking part in a Reuters poll had expected an unchanged reading.

SECOND-QUARTER SPEED UP?

Britain's economy grew at its fastest annual pace in more than six years in the first quarter of this year.

"The UK economic recovery shows no signs of running out of steam, and growth could even accelerate further in the second quarter," said Chris Williamson, chief economist at PMI compiler Markit.

"The April numbers point to the economy growing by at least 0.8 percent again in the second quarter."

Britain is expected to grow faster than all the other Group of Seven economies this year although it remains a touch smaller than it was six years ago, before the financial crisis.

A composite index combining PMIs for manufacturing and construction, plus the services sector, showed output across the economy rose to 59.4 in April from 58.2 in March, back up to its highest level since November.

Companies in the private sector took on staff at the fastest rate in the survey's history, dating back to January 1998.

"The strength of the PMI's output and employment readings suggest that the discussion among policymakers about when interest rates will need to start rising will heat up, especially when viewed alongside recent house price gains," Williamson said.

Rob Wood, an economist with Berenberg bank in London who used to work at the BoE, said he expected at least one of the Bank's nine policymakers to break ranks and vote for a rate hike by late summer.

He saw a 35 percent chance of a first hike in the fourth quarter of this year, earlier than the second quarter of 2015 that the Bank pointed to in February. The BoE is due to publish new economic forecasts on Wednesday next week.

Tuesday's survey showed little sign of price pressures in the services sector, which accounts for more than three-quarters of Britain's economy and includes firms ranging from major banks to high street restaurants.

Growth in new work slipped a bit but rising confidence in the outlook was not far off February's four-and-a-half-year peak, helping to prompt companies to ramp up employment by the most since last October, the survey showed. (Writing by William Schomberg; Editing by Hugh Lawson)

FILED UNDER: