MPC in quandary after services data improves

 

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The Independent Online

The UK's all-important service sector registered a surprise expansion in September, according to new figures, adding to the dilemma facing the Bank of England's Monetary Policy Committee as it decides today whether to try to boost the economy.

The Markit/CIPS UK services Purchasing Managers Index rose to 52.9 last month, bouncing back from an eight-month low of 51.1 registered in August. The increase follows a rebound in the manufacturing sector recorded earlier this week by a similar Markit/CIPS survey.

However, the latest data from the services industry also indicates that business expectations among service managers continued to deteriorate in September. That index is now at its weakest level since March 2009. And some of the managers in the survey reported that gains in new business were not enough to compensate for recently completed contracts.

Chris Williamson, the chief economist at Markit, called the findings "a surprise uplift" but warned that the headline figure "masks the fact that all is not well in the UK services economy". He said: "Many firms reported that the ongoing expansion was only achieved by eating further into backlogs of work. This is clearly not sustainable and growth of new business will need to pick up in the coming months to prevent a downturn in both business activity and employment in the final quarter of 2011."

David Noble, chief executive officer at the Chartered Institute of Purchasing & Supply, was similarly downbeat, nothing that "the sector is still on a weak footing and uncertainty remains prevalent".

The MPC will announce at midday today its latest decision on interest rates and quantitative easing (QE), the policy of printing new money to boost the supply of affordable credit. The minutes of last month's MPC meeting indicated that some members were moving towards voting for another round of QE. This surprise increase in services figures, however, may mean the committee will wait before returning to QE, with November now seen as a more likely month for the decision.

That said, the MPC could also be influenced by the new data from the Office for National Statistics, which said yesterday that the UK economy had grown more slowly in the second quarter of 2011 than had been thought. The ONS revised its estimate of GDP growth down from 0.2 per cent to 0.1 per cent.

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