Carney facing guidance dilemma as economy rebounds

Mark Carney may be forced to back a rise in interest rates. Picture: Reuters
Mark Carney may be forced to back a rise in interest rates. Picture: Reuters
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Bank of England policymakers may be forced to push up interest rates earlier than planned after news of soaring service sector growth capped a run of up-beat economic news.

Governor Mark Carney has made a broad commitment to hold rates at their record low until unemployment falls below 7 per cent, something he forecasts is at least three years away.

While a further bout of quantitative easing is unlikely at today’s meeting of the Bank’s rate-setting committee, Carney has stressed that the economy needs a lot more help to keep it on the recovery path.

However, yesterday’s purchasing managers’ index for Britain’s powerhouse services sector revealed the fastest growth rate for more than six years, challenging the Bank’s cautious outlook.

New business at companies ranging from restaurants to law firms expanded at the sharpest rate for more than 16 years last month, according to the closely-watched survey by the Chartered Institute of Purchasing & Supply and data analysis firm Markit.

Booming growth in the sector, which generates about three-quarters of output, followed upbeat surveys of building sites and factories to indicate the economy is firing on all cylinders.

Daniel Skyte, an analyst at the Centre for Economics & Business Research, said: “The strong growth in all three sectors is of undoubted benefit to the economy and may put pressure on Mark Carney’s pledge to keep interest rates at their record low level until unemployment falls below 7 per cent.”

Howard Archer, chief UK economist at IHS Global Insight, added: “The recent stream of good news on the UK economy will highly likely fuel market scepticism that the Bank of England will not raise interest rates before mid-2016 as its forward guidance currently indicates.

“However, it is highly unlikely that the Bank will indicate any change in its stance following its September monetary policy committee meeting.”

The main services activity index rose to 60.5 in August, from 60.2 in July, well above the 50 mark which separates growth from contraction.