Slowdown in services sector eases pressure on BoE

Early signs of an economic slowdown have emerged, with figures showing that activity in the UK’s powerhouse services sector eased last month.

Bank of England Governor Mark Carney will publish the Banks latest economic projections in its quarterly inflation report on Thursday. Pictrure: AFP/Getty

Although the closely-watched purchasing managers’ index (PMI) revealed continued growth among services firm, the lower-than-expected reading comes on the back of weakness in the manufacturing sector and a surprise fall in construction output.

Economists at Barclays are now forecasting third-quarter growth of 0.5 per cent, which would mark a slowdown on the 0.7 per cent seen in the previous three-month period.

The data is expected to ease pressure on Bank of England policymakers to start raising interest rates. The latest decision by the monetary policy committee (MPC) will be announced today, and although borrowing costs are likely to remain on hold at 0.5 per cent, it is thought at least two members will have voted for a quarter-point increase.

According to the Cips/Market study, in which 50 separates growth from contraction, the services PMI gave a reading of 57.4 for July – down from 58.5 the previous month and below the figure of 58.8 forecast by Howard Archer, chief UK and European economist at IHS Global Insight.

The services PMI showed that growth was supported by financial services firms, which enjoyed the best rise in activity since 2013. This helped offset slower rates of expansion in all other areas of the sector, which accounts for almost 80 per cent of the UK’s gross domestic product (GDP).

Jobs were also created at the slowest rate since March 2014, according to the report, although 18 per cent of firms reported growth – double the proportion that cut staff during the month.

Archer said: “The overall modesty softer set of July purchasing managers’ surveys for services, manufacturing and construction may slightly dilute expectations that the Bank of England could edge interest rates up before the end of 2015 – particularly as the recent renewed falling back in oil prices suggests that inflation will be even lower than previously thought over the rest of this year.”

Rates have been on hold for more than six years and were expected to remain at 0.5 per cent until the middle of 2016, but speculation that an upward move may come sooner was fuelled last month when Bank governor Mark Carney said a decision would “come into sharper relief around the turn of this year.”

Today’s decision from the central bank’s rate-setting committee will, for the first time, be accompanied by minutes of the meeting.

On a day dubbed as “super Thursday”, Carney will also publish the Bank’s latest economic projections in its quarterly inflation report.

Chris Williamson, chief economist at Markit, said the PMI reports indicate GDP growth of 0.6 per cent at the start of the third quarter.

He added: “There are plenty of excuses to hold off from hiking interest rates any time soon, including zero inflation, a waning rate of job creation, a strong pound hurting exports and the latest signs of growth cooling.

“Policymakers will also be concerned about the global economic outlook, and slower growth in emerging markets in particular, which the manufacturing PMI showed to have slipped back into contraction in July.”

However, Williamson said a rate hike later this year remained a “distinct possibility”, as members would want to see stronger data than the latest PMI readings before feeling comfortable about voting for higher borrowing costs.