News Column

UK services sector growth speeds ahead in July fuelling interest rate rise talk

August 6, 2014

Angela Monaghan Katie Allen,

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

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

The headline index rose to 59.1 from 57.7 in June, where anything above 50 indicates expansion. Economists were expecting a more modest increase to 57.9.

The figure offsets weakening growth indicated in the equivalent surveys for the manufacturing and construction sectors, suggesting the third quarter got off to a reasonable start in July following growth of 0.8% in both the first and second quarters.

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 the better-than-expected PMI increased the prospects that one or members of the Bank's nine-strong monetary policy committee will vote for a rate rise when it meets for its monthly policy decision on Wednesday and Thursday. It would be the first time a member voted for a rise since rates were cut to an all-time low of 0.5% in March 2009.

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 the UK 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.

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Source: Guardian Web

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