Interest rates could well go up again in May as the dominant services sector rebounded last month, growing at its fastest pace in four months, new data show.
The latest IHS Markit/CIPS UK services purchasing managers’ index rose to 54.5 from 53 in January, beating economists’ expectations of 53.2, with a reading above 50 indicating growth.
Chris Williamson, chief business economist at IHS Markit, said the Bank of England, which has seemed eager to start rising rates, was likely to take the ‘modest rebound’ in the services sector as an excuse to hike rates in the coming months.
Services companies, which includes banks as well as restaurants, have seen price pressures ease but domestic demand was slower as stretched households have less money to spare
‘With Bank of England policymakers sounding hawkish even following the January fall in the PMI to a one-and-a-half year low, the February upturn in the surveys surely leaves a May rate hike very much in play,’ he said.
‘The Bank seems keen to normalise interest rates even if output growth is below levels it would usually like to see when tightening policy.’
Interest rates are currently at 0.5 per cent and a possible future increase is widely expected to be a small 0.25 per cent.
The Bank has previously indicated that it may be hiking rates in May.
Last month Gertjan Vlieghe, a member of the monetary policy committee that sets rates, said a pick-up in wages and an increase in household debt meant the economy was ‘ready for somewhat higher interest rates’.
His words were given substance by official data showing that inflation remained obstinately at three per cent for a second consecutive month in January.
The services sector, which includes banks as well as restaurants and hairdressers, makes up about 80 per cent of the UK economy, hence its health is very much indicative of the health of the overall economy.
Rate hike on the cards? The Bank could raise the base rate in May, according to Markit
While new business picked up to hit its highest since May last year, helped by a ‘particularly marked’ growth in business-to-business sales, domestic demand was slower as stretched households have less money to spare, according to Markit.
The survey also found that price pressures that have weighed companies down since the pound collapsed after Brexit had eased last month, with input price inflation growing at its slowest pace in a year and half.
Prices charged by services sector companies also increased at the weakest rate for six month, Markit said.
The services sector’s rebound comes after the manufacturing industry drifted to an eight-month low in February, while construction sector unexpectedly rebounded but remained under pressure from weak confidence and political uncertainty.
Williamson said he expected the economy to grow by 0.4 per cent in the first quarter, matching growth seen in the last three months of 2017.
‘The service sector overtook manufacturing as the fastest growing part of the economy for only the second time since the referendum in February [..],’ Williamson said.
‘With the construction sector also pulling out of the stagnation seen in January, the economy as a whole picked up some momentum again in February, despite the slowing in manufacturing.
New business picked up to hit its highest since May last year
‘The PMI surveys so far collectively point to the economy growing by nearly 0.4% in the first quarter to indicate that a resiliently steady pace of expansion has been maintained.’
But Howard Archer, EY ITEM Club’s chief economic adviser, said that economic growth could actually come in slower in the first quarter due to recent extreme weather conditions.
‘Today’s figures reinforce our belief that the Bank of England will hike interest rates again in May,’ he added.
‘While price pressures have eased according to the purchasing managers’ surveys, they are still relatively elevated and the MPC is clearly keen to gradually normalise monetary policy.’
The pound was up 0.1 per cent against the US dollar to 1.381 shortly after the announcement. Against the euro, the pound was 0.2 per cent higher at 1.121.