UK economy expands in February but persisting cost pressures pose challenge for BoE

LONDON, March 4 (Reuters) - Britain's services sector grew robustly during February, according to a survey on Wednesday that also showed job cuts and price pressures persisted, a potential worry for the Bank of England ahead of this month's interest rate decision.

The S&P Global UK Services Purchasing Managers' Index (PMI) fell slightly to 53.9 last month from January's five-month high of 54.0, but was in line with a preliminary reading.

PMI readings above 50.0 indicate growth in activity, while those below that level point to a contraction. The composite PMI, which combines the services survey with growth in the manufacturing sector published on Monday, increased to its highest since August 2024 at was steady in February at 53.7, jointly the highest reading since August 2024.

The readings came a day after finance minister Rachel Reeves announced new economic and budget forecasts to parliament, which showed unemployment is expected to increase further this year - something the PMI underscored.

"February data pointed to a solid reduction in employment numbers, despite a sustained recovery in business activity. Job losses reflected ongoing efforts to focus on boosting productivity and mitigate sharply rising input costs," Tim Moore, economics director at S&P Global Market Intelligence, said.

"Higher payroll costs were widely cited as leading to a strong pace of overall input cost inflation.

Hiring shrank for the 17th month in a row, according to the composite PMI - the longest unbroken decline since 2010.

Britain's minimum wage rate will rise by 4.1% to 12.71 pounds an hour in April after a 6.7% uplift last year.

Input costs for services firms rose at the slowest pace since November in February, and prices charged by businesses rose at the fastest pace since August.

The BoE, which is expected to keep interest rates at 3.75% this month, is closely watching services price inflation as it considers the pace at which it can reduce borrowing costs. Investors on Tuesday slashed their bets on BoE interest rate cuts this year as concerns grew that the conflict in the Middle East could fuel inflation.

Services business grew less optimistic in February, although some survey respondents noted a positive impact on demand from lower borrowing costs. (Reporting by Suban Abdulla; Editing by Hugh Lawson)