Less chance of interest rate cut as evidence of ‘Boris bounce’ grows

AN INTEREST rate cut became less likely yesterday after a closely watched survey showed the economy has swung back into growth mode after last month’s Conservative election win.

Traders reined in expectations that the Bank of England could slash rates later this month, on hopes that a downturn in the run-up to the election has come to an end and a “Boris bounce” has taken hold.

IHS Markit’s purchasing managers’ index (PMI) showed that private sector activity grew in January for the first time in five months. The PMI rose to 52.4 in January, its highest level for more than a year, in an unexpectedly strong recovery from 49.3 the previous month. Any score above 50 signals growth. It suggests the economy has turned a corner following an anaemic end to 2019, with the election at last ending the deadlock over Brexit which had paralysed businesses and shoppers. The reading suggests there will be growth of 0.2pc in the first three months of 2020, IHS Markit said.

A slew of data from December suggested stagnation had set in, sparking hints from policymakers that the Bank of England would be forced to slash rates later this month. Last week, the market predicted that a rate cut was more likely than not, but the forecast chance of a reduction fell to 47pc after the PMI was released.

The dominant services industry led the rise in activity, while manufacturing remained in contraction despite also bouncing back.

Hiring and growth expectations also picked up, IHS Markit said. The sharp rise in private sector activity was the largest since August 2016.

IHS Markit said: “January data … highlighted a decisive change of direction for the private sector economy art the start of 2020.” But the pound lost ground on currency markets amid lingering doubts ahead of next week’s interest rates meeting, and a strengthening dollar due to the public health crisis in China.

Meanwhile, a rebound in the struggling eurozone started to wane. The survey remained in stagnation territory at 50.9, unchanged from December despite an uptick in Germany.