Services sector slowdown prompts speculation of more Bank of England stimulus

Markit/CIPS survey snapshot of the sector described as 'exceptionally weak'

The facade of the headquarters of the Bank of England in London (Getty)

The sharpest slowdown in service sector activity in three years has exacerbated fears over the strength of the recovery and raised talk of more stimulus being deployed by the Bank of England.

The Markit/CIPS survey snapshot of the sector, which accounts for three quarters of output, came in at 52.7 in February.

That’s above the 50 mark that separates expansion from contraction, but down sharply from 55.6 in January and below the 55.1 City economists had expected. It was also the weakest reading since March 2013.

Samuel Tombs of Pantheon Macroeconomics described the survey as “exceptionally weak”. Chris Williamson of Markit said there were concerns among managers in the service sector over the increased risk of “Brexit” and associated financial market volatility. “The survey suggests the economy’s main engine of growth is at risk of stalling” he said.

Alan Clarke of Scotiabank said the survey – alongside weak February readings for manufacturing and construction – was consistent with GDP growth in the first quarter of the year slowing to 0.3 per cent, down from 0.5 per cent in the final quarter of last year. He added the readings were “in rate cut territory”.

Policy makers may soon need to dig deeper into the toolbox

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The Governor of the Bank of Bank of England, Mark Carney, has repeatedly stressed that the next move in interest rates is likely to be up. But he did say last month that rates could drop to zero, from 0.5 per cent at the moment, if necessary to stimulate the economy.

Financial markets are not pricing in the next upwards move in the Bank’s base rate until 2018 at the earliest.

Mr Williamson said the latest survey reading “puts to bed” any talk of the Bank of England raising rates in the near future.

“The focus will instead increasingly shift to whether policymakers may soon need to dig deeper into the toolbox to introduce new measures to shore up the economy with additional stimulus, and what tools might be used” he said.