By Ana Nicolaci da Costa
LONDON (Reuters) - Growth in Britain's dominant service sector slowed unexpectedly in January but activity remained strong, suggesting the economy made a robust start to 2014, a survey showed on Wednesday.
One day before the Bank of England announces its February rate decision, the survey by data company Markit also showed a pick-up in price pressures for service firms but not to a level that would indicate a problem for the central bank.
The speed of Britain's recovery has sparked speculation about the timing of a rate hike, but policymakers have said the bank is in no hurry to raise interest rates as inflation has fallen to its target and wage growth remains subdued.
Markit's services purchasing managers' index (PMI) eased to 58.3 in January - its lowest since June - from 58.8 in December and below a forecast of 59.0 in a Reuters survey.
Sterling dipped and 10-year gilt yields fell to a three-month low after the figures as investors viewed the data as further evidence that the Bank was unlikely to raise rates soon.
However, the figure remained well above the 50 mark that separates growth from contraction and business confidence was at its highest in nearly four years, bolstered by outstanding business which reached its highest level since May 1997.
"Even with the easing seen in January, the sector is still expanding at a rate that bodes well for another strong GDP reading in the first quarter," said Chris Williamson, chief economist at Markit.
The survey showed the service sector, which makes up more than three-quarters of Britain's GDP, remained an important engine of growth at the start of the year.
Similar surveys this week showed Britain's rebound was being supported by other sectors, with construction activity growing at its fastest pace in 6-1/2 years and manufacturing growth easing in January but still firm.
The composite index of the three PMIs eased to 59.1 in January - its lowest since June but still some way above the 50 mark - from 59.4 in December, Markit said.
Williamson said the three PMI surveys suggested Britain was on course for quarterly GDP growth of 0.8 percent in the first three months of 2014.
PRICE PRESSURES CONTAINED
This is a pick-up from a preliminary official reading of 0.7 percent growth in the fourth quarter of 2013, though lower than growth indicated by previous PMI surveys, which Samuel Tombs, UK economist at Capital Economics, said had been too optimistic.
Despite the strength of the services sector, price pressures were still considered contained. The index for input prices in the services sector rose to 57.3 from 55.9 in December, but Williamson said worrying levels would be above 60.
"The survey also suggests that inflationary pressures and wage growth remain muted, which provides policymakers with extra leeway to keep policy loose for longer while the economy continues its recovery."
Britain's economy had one of the fastest recoveries among industrialised nations last year but growth has largely been driven by household spending - a trend which the Bank wants to see balanced by stronger exports and more business investment.
The business expectations index for the service sector rose to its highest since March 2010. Markit said firms were planning more recruitment and investment to meet expected demand.
Indeed, an index of growth in employment in the services, manufacturing and construction sectors together rose to 55.6 in January, its highest since October and matching its highest level on record, up from 55.2 in December, Markit said.
This could push the jobless rate sooner to the BoE's 7.0 percent threshold for reviewing interest rates, but the Bank policymakers have indicated that rate hikes are not imminent.
Economists expect the Bank to keep rates at a record low of 0.5 percent on Thursday but the decision will be closely watched in case it makes a statement on its forward guidance plans.
"Although the Bank of England shows every sign of wanting to keep interest rates low for quite a while longer, the economy is tightening faster than they had expected," said Rob Wood, chief UK economist at Berenberg.
"We expect the first rate hike in Q1 2015, with a 30 percent chance of an increase in Q4 2014."
(Reporting by Ana Nicolaci da Costa; Editing by William; Schomberg and Gareth Jones)