Services sector gives fuel to MPC hawks

The performance will add to pressure on this week's talks by Bank of England policymakers. Picture: PA
The performance will add to pressure on this week's talks by Bank of England policymakers. Picture: PA
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Britain’s services sector grew at its fastest pace in ten months during August, adding to the pressure on the Bank of England to start edging interest rates higher before the year’s end.

The Markit/Cips services purchasing managers’ index (PMI) registered 60.5, up from 59.1 in July and well above the benchmark of 50 which indicates growth.

Alongside other PMI surveys this week showing a continuing construction boom offset by a weakened performance in manufacturing, the figures suggest that the economy grew at its fastest rate since last November.

Chris Williamson, chief economist at Markit, is forecasting another period of strong economic growth in the third quarter, similar to the 0.8 per cent rate of expansion seen in the first two quarters of the year.

The performance will add to pressure on this week’s talks by Bank of England policymakers after their first split decision on interest rates the previous month. The meeting of the monetary policy committee (MPC) concludes today, with a decision to hold rates widely expected.

However, with policymakers scrutinising so-called “slack” in the economy in order to pre-empt an inflationary spiral, economists said the latest figures favoured the MPC rebels arguing for an early move, especially since the construction sector’s PMI report earlier this week showed wages rising as a result of skills shortages.

Howard Archer, chief UK economist at IHS Global Insight, said: “With governor Mark Carney stressing that the strength of data will drive when the Bank of England first edge up interest rates, the overall robust set of August purchasing managers’ surveys keeps open the possibility that the bank could act before the end of 2014.

“However, we now think it is most likely that the bank will hold off until the early months of 2015 given low inflation, still very weak earnings growth and the downside risks to growth coming from heightened geopolitical tensions and stuttering eurozone economic activity.”

Williamson added: “The worry is that growth remains too dependent on the domestic economy, raising the risk that higher interest rates will derail the upturn.”