Better service sector growth may shift balance towards interest rate rise

Financial markets are not pricing in a first rate rise from the current record low of 0.5% until the end of 2016

Former Bank Of England governor Lord King said the world’s economic recovery was ‘neither strong, nor sustainable’ (PA)

More evidence of the economy’s recovery from a summer slowdown strengthened the hand of the Bank of England’s hawks ahead of its latest decision on interest rates.

Faster growth in October from services firms – accounting for three-quarters of overall growth across companies ranging from accountants to hairdressers – was expected to tip more of the nine-strong Monetary Policy Committee to join the lone voice of Ian McCafferty in voting for a first interest rate rise since 2007.

The latest Chartered Institute of Procurement & Supply/Markit activity index moved further above the 50 no-change mark, from 53.3 to 54.9, beating City hopes and stretching the sector’s unbroken growth run to almost three years. Businesses took on more staff and won more work from both new and existing customers, Cips said.

Coupled with strong months for manufacturers and builders, the trio of surveys indicates overall growth could pick up to 0.6 per cent in the final three months of the year, improving on the disappointing 0.5 per cent seen between July and September.

Markit’s chief economist, Chris Williamson, said: “Such an improvement, together with the revival in hiring signalled by the three surveys, with job creation hitting an eight-month high in October, may coax more policymakers into raising interest rates before the end of the year.”

Philip Shaw, Investec’s chief UK economist, nominated Kristin Forbes as the most likely MPC member to switch sides. In a recent speech she said the “next move in UK interest rates will be up and that it will occur sooner rather than later”, despite the “doom and gloom” over the international economy. Martin Weale, who was voting for higher interest rates until early this year – is another potential switcher.

Financial markets are not pricing in a first rate rise from the current record low of 0.5 per cent until the end of 2016. Until last week’s unexpectedly hawkish statement from the US Federal Reserve, traders believed the first UK rise might not occur until 2017.

“Super Thursday” – when the MPC’s rates decision, the minutes of its meeting and the latest Inflation Report are published – should give further hints on the Bank’s thinking. Economists expect the Bank to signal a rate rise sooner than the overall market believes, but lower oil prices since the summer are likely to drag down its near-term inflation forecasts after the consumer prices index turned negative again last month. Against that, the pound is weaker than the Bank had expected in August – which will eventually push up import prices – while the jobs market is also stronger, another source of potential inflation. David Tinsley, an economist at UBS, said: “The key question for the MPC is to what extent the downside influences on the forecast outweigh those on the upside.”