My suggestion of a surprise rate cut tomorrow looks less likely following today’s strong services purchasing managers’ survey for February. The business activity index rebounded to a five-month high, while prices charged surged to a new record.

The case for a reduction rests on credit market deterioration since the last MPC meeting. Three-month LIBOR has risen from 5.58% before the February rate cut to 5.77% currently, while the yield spread of A-rated sterling bonds over gilts has climbed 48 bp, reaching its highest level since before the early 1990s recession. These changes imply the economy faces increasing financial headwinds despite last month’s policy move.

Incorporating the services PMI results, the MPC-ometer rates the chances of a cut tomorrow at exactly 50%. It continues to suggest a high probability of a reduction by April.

The purchasing managers’ survey is strangely at odds with the CBI / Grant Thornton survey of consumer and business services, also published today. The CBI survey reported a sharp drop in expected business volumes and a reduction in price expectations. As the charts below show, the two surveys normally correlate closely, raising the possibility that this month's PMI improvement will prove a blip.