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UK services growth casts doubt on BoE rate cut prospects: PMI

Wednesday, October 5, 2016 - 16:39

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Britain's services sector grew more strongly than expected in September, a survey showed, adding to doubts about the need for a new Bank of England interest rate cut next month to cushion the Brexit vote impact.

[LONDON] Britain's services sector grew more strongly than expected in September, a survey showed, adding to doubts about the need for a new Bank of England interest rate cut next month to cushion the Brexit vote impact.

The Markit/CIPS Purchasing Managers' Index (PMI) for the dominant services sector slowed slightly to 52.6 in September from 52.9 in August, when it staged the biggest one-month gain in the survey's 20-year history.

But the reading was comfortably higher than the median forecast of 52.0 in a Reuters poll of economists and Markit said the overall performance of the economy last month looked like it was the strongest since January.

Markit's surveys of British manufacturing and construction published earlier this week also came in stronger than expected, further confounding predictions that June's vote to leave the European Union would deliver a rapid blow to the economy.

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"The solid PMI readings for September will cast doubt on the need for any further stimulus from the Bank of England in coming months," said Chris Williamson, chief business economist at IHS Markit.

The chances of a British recession in the second half of 2016 had "all but evaporated", Markit said.

But widespread concerns remained about the potential future impact of Brexit, Mr Williamson said, echoing concerns among investors who pushed the value of sterling to a 31-year low against the US dollar this week.

"As such, the economy remains vulnerable to further setbacks and the need for policy action later in the year cannot be ruled out," Mr Williamson said.

On Tuesday, the International Monetary Fund lowered its forecast for British economic growth next year to 1.1 per cent from 1.3 per cent in July.

The BoE cut rates to a record low of 0.25 per cent in August alongside other measures to boost growth. In September it said most of its policymakers expected to cut borrowing costs again before the end of 2016, unless there were significant changes to the outlook for the economy.

Finance minister Philip Hammond is also gauging the need for further stimulus as he prepares to deliver his first budget statement on Nov 23. He warned this week that turbulence lies ahead as Britain prepares to leave the EU and strike a new trade deal with its former partners.

Markit said the PMI indexes published this week suggested the economy is now growing at a quarterly rate of about 0.3 per cent, in line with the BoE's latest estimate for growth in the July-September period.

But looking at the PMI readings for the third quarter as a whole, growth was probably only about 0.1 per cent, due to a sharp slump in the surveys in July, immediately after the referendum vote, it said.

Official data has shown that the services sector fared much better in July than the Markit survey had indicated.

Markit said the slump in the value of sterling against other currencies had buoyed the economy, and growth in new business in the services sector was its fastest since February.

But the weaker pound was also pushing up prices, something the BoE expects to weigh heavily on consumer spending power next year.

Service firms raised their prices by the most since January 2014, Markit said.

The Markit PMI covers about half the services sector, as it does not include retailers or public services. Overall, services account for about 80 per cent of British economic output.

REUTERS

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