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Services sector expansion sets scene for Bank dispute over interest rates: Activity rising at fastest rate in eight months At least one MPC member expected to vote for rise: Tracking the index

August 6, 2014

Angela Monaghan Katie Allen



Britain's dominant services sector enjoyed a stronger than expected July, raising expectations that one or more Bank of England policymakers will vote for a rise in interest rates this week.

Activity in the sector - which includes restaurants, hotels, transport and business services and accounts for more than three-quarters of the economy - rose at its fastest pace in eight months, according to the Markit/CIPS services purchasing managers' index (PMI).

The headline index rose to 59.1 from 57.7 in July, and any reading above 50 indicates expansion. Economists were expecting a more modest increase to 57.9.

The figure offsets weakening growth indicated in the equivalent survey for manufacturing, suggesting that the third quarter got off to a reasonable start in July following growth of 0.8% in both the first and second quarters. Economists said there was no sign as yet of the slower growth predicted by the Bank for the second half of the year.

Chris Williamson, chief economist at Markit, said: "The survey data point to the growing likelihood of yet another strong economic expansion in the third quarter. We would expect to see GDP rise by 0.8% again if the surveys hold their current levels."

Economists said that the better than expected PMI increased the prospects that one or more members of the Bank's nine-strong monetary policy committee would vote for a rate rise when it makes its monthly policy decision tomorrow.

It would be the first time that a member has voted for a rise since July 2011, when Martin Weale and Spencer Dale voted for an increase of 0.25 of a percentage point. They were overruled by colleagues, and Bank rate has been unchanged at 0.5% since March 2009.

The MPC has made it clear in recent weeks that it will not raise interest rates until it sees a pickup in wage growth, which is still lagging behind inflation, despite economic recovery.

But services companies surveyed for the July PMI reported that their operating costs were being driven higher by increases in wages, reinforcing expectations that rates might rise sooner rather than later.

James Knightley, economist at ING, said: "[The services PMI] suggests that the UK economy is maintaining its momentum in the third quarter and will increase speculation that one, possibly two members of the Bank of England's MPC will be voting for a rate rise at Thursday's policy meeting."

However, the majority of MPC members are expected to vote to leave rates unchanged, and any dissent will only be made public when the minutes of the meeting are published two weeks after the event.

Heightened expectations of a rate rise in Britain on the back of the stronger than expected services PMI pushed the pound up against the dollar and the euro. Sterling rose to a session high of $1.6890, up 0.15% on the day. The euro slipped to a day's low against the pound of 79.330p.

The all-sector PMI for July - combining the services, construction and manufacturing surveys - showed accelerating growth, with an increase to 59.1 from 58.4 in June.

Martin Beck, senior economic adviser to the EY Item Club said the all-sector survey suggested a strong start to the third quarter but cautioned that it was at odds with other economic data.

"For example, July's GfK consumer confidence barometer dropped for the first time since December, while house price growth (on the Nationwide measure) slowed in the same month to the lowest rate since April 2013," he said.

Despite the increase in the headline index, employers across the three sectors combined created jobs at a slower rate in July than they did in June.

In the eurozone, a combination of Markit's manufacturing and services PMIs revealed mixed fortunes for the region's biggest economies.

Overall, the eurozone's composite output index rose to a three-month high of 53.8 in July, from 52.8 in June, suggesting the single currency bloc's recovery accelerated at the start of the third quarter.

However, a breakdown by country showed a strong performance from Germany while Spain offset another weak month for France.

The index in Germany and Spain hit a three-month high of 55.7. In France, the survey also hit a three-month high, but at 49.4 - below the crucial 50 mark - it was another month of shrinking activity.

Williamson said that although the data overall was positive, the eurozone was still facing a lot of uncertainty.

"There is clearly growing anxiety about the economic impact of the crisis in Ukraine. At the moment, the effects seem to be limited to weaker growth of demand at exporting manufacturers, but any further escalation of the crisis could further subdue the overall pace of economic growth in coming months."

The eurozone economy grew by 0.4% in the first quarter, while unemployment remains elevated at 11.5%.

Captions:

Restaurants helped Britain's headline services index rise to 59.1 from 57.7 in July Photograph: Carl Court/AFP/Getty



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Source: Guardian (UK)


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