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UK services prop up economy on better-than-forecast growth

[LONDON] UK services activity grew more than expected in February, supporting economic growth and keeping alive the prospect of an interest-rate increase within months.

IHS Markit's Purchasing Managers Index for the biggest part of the economy jumped to 54.5 - a four-month high - from 53 in January. That's well above the 53.3 reading forecast by economists in a Bloomberg survey. The composite PMI also rose, though only to a two-month high.

The report showed that new business picked up for a second month and the backlogs of business increased, which bodes well for the coming months. There was also a warning about skills shortages from service companies.

While Markit's manufacturing index for February declined, construction performed better, and it said the surveys show a "steady pace" of economic expansion is being maintained. It estimates growth of 0.4 percent this quarter, matching the rate of the final three months of 2017.

"Beyond the current quarter, the bigger picture for 2018 is likely to be one where the economy grows a little faster on average than 2017. The pace of the expansion should be enough for the last remaining spare capacity in the economy to be eroded. That will justify the Bank of England tightening monetary policy," said Niraj Shah and Dan Hanson, Bloomberg Economics.

BOE Governor Mark Carney has said that more interest-rate increases will be needed to keep inflation in check, though he's refused to commit to any specific timing. Traders are pricing in a high chance of a hike in May, and some economists say there may even be two moves this year. BE economists say while a hike in May can't be ruled out, they expect the central bank to wait until August.