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EUROPE ECONOMY-Price-cutting European firms enjoy buoyant January

* PMIs point to Q1 euro zone growth of 0.3 pct – Markit

* Firms in the bloc cut prices at steepest rate in nearly 5 years

* Data lends support to ECB’s quantitative easing programme

* British service industry grows much faster than expected

By Jonathan Cable

LONDON, Feb 4 (Reuters) – January was euro zone firms’ best month since mid-2014 but they also cut prices at the fastest rate in nearly five years, a survey found, lending support to the European Central Bank’s decision to scale up its stimulus programme.

In Britain, outside the currency union and where markets are instead focusing on when monetary policy will be tightened, a sister survey showed activity in the dominant service industry expanded faster than anyone polled by Reuters had expected.

“It’s all good news. We knew QE (quantitative easing) was coming and it was factored in. So it’s not unreasonable to say ‘Crikey, that QE works quick’.” said Alan Clarke, an economist at Scotiabank.

“In Britain, it suggests lower oil prices are starting to boost business confidence and that there is probably more good news ahead.”

Wednesday’s euro zone survey, combining manufacturing and services, was carried out mostly before the ECB announced a near one-trillion-euro quantitative easing programme of bond purchases to revive inflation and boost the economy,

Data compiler Markit said it pointed to first-quarter economic growth of 0.3 percent in the bloc.

That matches the median forecast in a Reuters poll last month and, if realised, would beat the 0.1 percent economists have pencilled in for the last three months of 2014.

Markit’s final January Composite Purchasing Managers’ Index (PMI) stood at 52.6, higher than a preliminary estimate of 52.2 and December’s 51.4.

However, growth came at a cost to margins. An index measuring output prices fell to 46.9 from December’s 48.1, its lowest reading since February 2010, suggesting firms were slashing prices to drum up trade.

Annual consumer prices dropped a record-equalling 0.6 percent last month as commodity prices, Brent crude in particular, tumbled.

Likely encouraged by falling prices, retail sales in the bloc were the highest in almost eight years in December as Christmas shoppers splashed out.

Price-cutting also helped drive service industry activity up at the fastest rate in five months. The services sector PMI rose to 52.7 from December’s 51.6, ahead of the flash 52.3 estimate.

Confidence about the ECB’s QE programme and signs of growth in new orders accelerating helped lift a gauge of optimism among service firms by the biggest one-month margin in over five years.

Echoing the ECB’s loosening, central banks from Switzerland to Turkey to Canada and Australia have cut interest rates in the past few weeks.

But Iceland’s central bank kept rates unchanged on Wednesday, indicating the direction of its next policy move was uncertain as it raised its economic growth forecast for 2015 and predicted low inflation into next year.

GERMANY HOPEFUL, FRANCE LAGS

Britain has likewise been grappling with falling inflation, which at 0.5 percent is far below the Bank of England’s 2 percent goal, but unlike the euro zone its economy has enjoyed relatively healthy growth.

Recent Reuters polls have seen rate hike expectations move steadily further out and muddying the waters more for economists trying to predict when the Bank would act, Britain’s PMI came in at 57.2, higher than any forecast polled by Reuters.

That suggests the British economy as a whole is growing at a rate slightly above the 0.5 percent it managed in the final three months of 2014, Markit said.

“Rate setters will welcome any good news with open arms. But with inflationary pressures very weak at present they face something of a communication difficulty,” said Rob Wood, chief UK economist at Berenberg Bank.

“The BoE will want to sound dovish in next week’s Inflation Report press conference.”

Germany’s private sector expanded faster in January than at the end of last year as companies received new orders and took on staff, implying Europe’s largest economy may be picking up.

Spain’s economic recovery gathered momentum while Italy’s service sector returned to growth. But it was a different story in France, the bloc’s second biggest economy, whose dominant service industry sank back into the red.

(Editing by Ross Finley and John Stonestreet)

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