Rate rise on cards after services power ahead

THE chances of an interest rate rise by the end of the year rose yesterday after Britain’s powerhouse services sector grew more than expected last month.
The Bank of England, led by Mark Carney, are not expected to raise interest rates until 2016. Picture: PAThe Bank of England, led by Mark Carney, are not expected to raise interest rates until 2016. Picture: PA
The Bank of England, led by Mark Carney, are not expected to raise interest rates until 2016. Picture: PA

Markit/Cips’ latest purchasing managers’ index for the sector – more than two-thirds of the UK economy – rose by 2 points in June to 58.5, topping forecasts and staying comfortably above the 50 mark that separates growth from contraction.

Combined with PMI reports for the manufacturing and construction sectors published earlier this week, Markit said the gain suggested Britain’s economy expanded by about 0.5 per cent from April through June, compared with an official reading of 0.4 per cent in the first three months of the year.

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Chris Williamson, chief economist at Markit, said: “The UK PMI surveys indicate that the pace of economic growth rebounded in June, from what appears to have been a brief lull caused by the general election.

“The buoyancy of the service sector PMI survey data in particular increases the possibility of interest rates rising later this year, especially when viewed alongside the recent upturn in wage growth to the highest since early-2009.

“A rate hike isn’t imminent, however, not least because policymakers will want to avoid adding further stress and uncertainty while the Greek debt crisis rolls on.”

The detail behind the upbeat services survey, which does not include retailers or the public sector, presented a mixed picture. Service businesses took on staff at the slowest pace this year. New orders also increased at the weakest pace so far in 2015. However, companies’ optimism regarding the coming year remained at a high level.

Howard Archer, chief UK and European economist at forecasting consultancy IHS Global Insight, said the data offered a boost for second-quarter growth hopes.

“The pretty buoyant June services sector purchasing managers’ survey makes us more confident on our call that GDP growth picked up to at least 0.6 per cent quarter-on-quarter in the second quarter and could very well have been 0.7 per cent,” noted Archer.

“This would be up from 0.4 per cent in the first quarter. Robust consumer spending is likely to have underpinned growth in the second quarter along with improved services activity.”

Meanwhile, the CBI said today the rate of economic growth had eased in the three months to June, but activity remained solid across the quarter as a whole.

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Releasing its latest growth indicator, the business lobby group said expectations were buoyant, with respondents anticipating that growth will bounce back in the next three months. Its survey quizzed 752 businesses across the manufacturing, retail and service sectors.

Rain Newton-Smith, CBI director of economics, said: “Despite an easing in performance this month, activity over the quarter as a whole has been good. We expect the economy to sustain a solid pace of growth over the remainder of the year as lower oil prices and inflation continue to boost real incomes and consumer spending.”