Strong services growth points to early Bank of England rate rise

The Bank has not raised interest rates since July 2007

A post-election spurt from the UK’s army of services firms has raised the chances of a first rise in interest rates since 2007, experts said.

This, biggest slice of the economy – which ranges from hairdressers and accountants to IT workers – stepped up the pace in June after growth slipped to a five-month low in May, according to the Chartered Institute of Procurement & Supply.

Its activity index, where a score over 50 indicates growth, accelerated from 56.5 to 58.5. “The pre-election hiatus has become a distant memory,” Cips’ chief executive David Noble said.

The survey’s compiler Markit said its latest batch of data – which also covers builders and manufacturers – signalled UK growth of 0.5 per cent between April and June, faster than the first quarter of the year.

“The post-election rebound in service sector business activity adds to the likelihood of the Bank of England starting to nudge rates higher later this year,” its chief economist Chris Williamson said.

The pound spiked briefly as the survey was released as a rate hike this year would be earlier than the spring 2016 move pencilled in by financial markets. The Bank’s Monetary Policy Committee has not raised interest rates since July 2007, on the eve of the credit crunch.

Cips’ survey does not include the significant retail sector but signs of recovery among services firms will be welcomed by the MPC. The pace of growth halved in the sector to 0.4 per cent in the first three months of 2015, leaving the wider economy expanding at the same rate.

But HSBC’s UK economist Liz Martins said: “As usual, it points to an unbalanced economy, with services doing all the heavy lifting. The manufacturing PMI survey was weak in June, suggesting that, once again, there is unlikely to be much a contribution to growth from that sector.

Confidence among services firms remains high, although the pace of hiring slowed and companies ate into outstanding workloads for the first time since 2013. Mr Williamson added: “Policymakers will want to see further improvements in the data, including signs of a sustainable upturn in pay growth, before feeling comfortable that the UK economy is ready for higher interest rates.”

The Bank of England is pencilling in stronger growth of 0.7 per cent between April and June, well ahead of the 0.4 per cent seen in the first quarter, as near-zero inflation and a return to real-terms wage growth help spur on the economy.

Samuel Tombs, the senior UK economist at Capital Economics, said: “Since real incomes are now growing strongly, credit conditions are improving and confidence is high, the UK recovery should maintain this strong pace over the rest of the year.”