The dilemma for the Bank of England over an interest-rate verdict next week seen as the closest of calls was sharpened yesterday by conflicting signals on the state of the services sector, the engine room of the economy.

In ammunition for hawks on the Bank’s rate-setting Monetary Policy Committee who are expected to resist a further cut in base rates on Thursday on the heels of December’s reduction, a key survey of services businesses showed that the sector’s activity staged a surprise rebound last month, while its inflationary pressures grew.

The quandary for the MPC as it frets over deteriorating prospects for the economy was heightened, however, as the same survey also showed that expectations of future business among services groups sank last month to the lowest level for six years.

Despite that, many City economists said that the combination of a modest but unexpected revival in conditions in the economy’s biggest sector, alongside fresh evidence of persistent price pressures in corporate Britain, was likely to tip the scales in favour of interest rates being kept on hold this week.

Analysts said that even after more dismal news in recent days on the housing market and over lending conditions for both households and companies, yesterday’s survey could persuade the MPC’s hawks to stay their hand on Thursday until completion of the Bank’s next quarterly forecasts, due early next month.

The monthly CIPS/NTC services survey is seen by City analysts as data that is particularly influential over the Bank’s decision-making. An abrupt drop in its headline index of activity in November, its third steep decline in a row, was seen as decisive in helping clinch last month’s cut in base rates.

Yesterday, the headline index clawed back some ground, climbing from November’s reading of 51.9 to 52.4 for last month. Any figure abve 50 indicates expansion.

Even after the December improvement, economists said that the overall level of services activity indicated by the survey for the final quarter of last year pointed to the weakest expansion in the sector since early 2003. They cautioned, however, that the MPC’s hawkish faction would be more concerned over the data’s indications of persistent inflationary risks, than weaker activity or declining confidence levels.

The survey’s measure of prices charged by services businesses rose for a fifth month in a row to a ten-month high, while its gauge of costs rose to its highest since August 2006. Vicky Redwood, of Capital Economics, said the evidence of lingering price pressures “still presents a barrier to aggressive preemptive action by the MPC”.

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