Service surge eases stimulus calls

Mark Carney, the new Governor of the Bank of England. Picture: PA
Mark Carney, the new Governor of the Bank of England. Picture: PA
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MARK Carney, the Bank of England’s new governor, is likely to sit on his hands until next month at the earliest after further upbeat news on the economy slashed the chances of fresh monetary stimulus.

Analysts believe policymakers will vote against a fresh bout of money printing when they conclude their latest rate-setting meeting at lunchtime today.

Carney, who only took over the reins from predecessor Sir Mervyn King on Monday, has kicked off his stint as governor on a high note.

Solid soundings for the manufacturing and construction sectors were followed by news yesterday of the strongest growth in services output in more than two years.

The closely-monitored purchasing managers’ index (PMI) for the sector, which accounts for almost three-quarters of gross domestic product, leapt two points to 56.9, far higher than any economist had forecast and well above the 50 level that divides contraction from expansion.

Adding to the brighter economic news that has dominated Carney’s first week in office were separate surveys showing subdued inflation and rising demand for credit.

Sterling rose as investors speculated that the Bank of England’s next move may be to tighten policy, albeit not imminently, rather than to print more money, as had been widely expected after Carney’s appointment was announced in November.

Analysts expressed surprise at the strength of the services PMI, which showed new orders rising at the fastest pace in six years.

In a note entitled “Wow”, BNP Paribas UK economist David Tinsley said: “This data underlines that UK GDP in the second quarter looks set to be expanding at a solid rate.

“In advance of the [Bank of England’s] August inflation report view on the use of intermediate thresholds and forward guidance there is enough solid data to keep the monetary policy committee (MPC) on hold at Carney’s first meeting.”

Brian Hilliard, UK economist at Societe Generale, added: “I’m surprised by how strong it [the PMI] is. The policy point is that it looks rather difficult for Carney to come in with all guns blazing for more easing.”

Howard Archer, chief UK and European economist at IHS Global Insight, said a further round of quantitative easing could not be ruled out at next month’s meeting. An additional £25 billion, which some MPC members have been arguing for in recent months, would take the stock up to £400bn.

Separately, the Bank of England said yesterday that mortgage availability was set for a “significant” lift in the coming months as lenders become more willing to hand out low-deposit deals.

A “greater risk appetite” among lenders was given as one factor behind recent improvements seen in mortgage availability, along with a desire by lenders to increase their market shares.

The Bank’s credit conditions survey adds to a string of recent studies which have pointed to signs of life returning to the housing market.

Loan availability for businesses also picked up in the second quarter, among firms of all sizes, with big companies seeing the largest increase. Other evidence has suggested that many businesses remain reluctant to take on fresh finance, instead focusing on paying down debt.