News Column

UK's services sector growth puts rate rise a step closer

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 the third quarter got off to a reasonable start in July after growth of 0.8% in both the first and second quarters. Economists said there was no sign of the slower growth predicted by the Bank for the second half of the year.

Chris Williamson, the 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.

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 79.3p. 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.

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 US a surge in activity across the services sector in July fuelled by spending on new homes put the economy on track for a strong second half of 2014, according to a business survey.

Businesses recorded growth rates only slightly below the previous month's record as the US continued to rebound from the freezing weather in the spring that sent the economy's recovery into reverse.

But the Markit purchasing managers' index (PMI) contained warning signs that the 4% annualised GDP growth in the second quarter was unlikely to be maintained after service sector businesses reported a fall in confidence and a slowdown in job creation.


Restaurants helped Britain's headline services index rise to 59.1 from 57.7 in July - any reading above 50 indicates expansion Photograph: Carl Court/AFP/Getty

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Source: Guardian (UK)

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