Leap in services growth puts August rate rise ‘on the table’

A surprise growth spurt for the biggest chunk of the UK economy on Tuesday heightened expectations that the Bank of England would pull the trigger on an August rate rise.

The Chartered Institute of Procurement & Supply’s closely watched snapshot of services firms — accounting for more than three-quarters of the overall economy — revealed that in May its activity index, where a score over 50 indicates expansion, jumped to 54 from 52.8 the previous month.

The better-than-expected reading — the highest since February — immediately strengthened the pound as the City bet that Threadneedle Street would shed its previous caution and go for its second rate rise in nine months in the summer. Sterling rose 0.6 cent against the dollar to $1.3370 and also gained 0.3 cent against the euro.

Combined with previous surveys on the UK’s manufacturers and builders, data compiler IHS Markit estimates that the economy is growing around 0.4%, significantly improving on the anaemic 0.1% advance registered in the opening snow-blighted first quarter of the year.

ING Bank’s James Knightley said: “The Bank of England appears to have a preference to raise interest rates sooner rather than later based on a belief that wage growth will respond to a tight labour market, keeping inflation higher for longer. As such, these data releases keep the prospect of an August rate hike firmly on the table.”

The Bank had strongly hinted at a rate rise in May but rowed back from a move fearing the effect the “Beast from the East” would have on the data. But monetary policy committee member Silvana Tenreyro voiced the majority view on the committee this week as she stressed “the most likely scenario is that the GDP news is short-lived”.

But despite the faster growth, firms had difficulties recruiting and saw rising pressure on wages and other costs. New business wins were also subdued as the Cips survey also warned of uncertainty over Brexit delaying decisions by major clients. Business leaders expressed mounting concern this week over the lack of clarity on trading arrangements with the EU.

Chris Williamson, IHS Markit’s chief business economist, said: “The signs of economic growth rebounding in the second quarter will probably up the odds of the Bank hiking interest rates in coming months, likely August, but with indicators suggesting the economy could relapse, a rise is by no means assured.”