Services jump ups chances of May interest rate hike

● Business activity index rises to 54.5 in February from 53 – a four-month high

The odds shortened on a springtime interest rate hike yesterday after a surprise surge in growth from the services industry – accounting for more than three-quarters of the UK’S economic output.

The nation’s services’ firms – ranging from accountants and lawyers to restaurants, pubs, IT companies and transport firms – saw business activity rise at its fastest for four months.

According to the latest IHS Markit/cips UK services survey, the sector also saw the strongest upturn in new work since May 2017, with its activity index hitting 54.5 in February.

That compares with 53 in January, and where any figure above 50 denotes expansion. Chris Williamson, chief business economist at IHS Markit, said: “The service sector overtook manufacturing as the fastest growing part of the economy for only the second time since the (Brexit) refcips erendum in February, thanks to the largest rise in services activity for four months and waning growth of factory output.

“With the construction sector also pulling out of the stagnation seen in January, the economy as a whole picked up some momentum again (last month) despite the slowing in manufacturing.”

The survey also cited stronger job creation across the services sector, with payroll numbers rising to the greatest extent for five months as firms sought to boost operating capacity in response to improved order books.

Williamson said the services sector boost keeps a May interest rate hike from the Bank of England “very much in play”.

Sterling was up 0.1 per cent against the US dollar to $1.38 shortly after the announcement. Against the euro, it was 0.2 per cent higher at €1.12.

The IHS Markit/cips report said input cost inflation “moderated” to its lowest for a yearand-a-half.

Duncan Brock, director of customer relationships at (the Chartered Institute of Procurement & Supply), said the survey showed a mixed picture of business customers forging ahead with new orders “as consumers hesitated over concerns about possible rate rises impacting on their household budgets and what the future held”.

Brock also pointed out that although overall activity increased, “it was confidence that took a dip and still remained below the long-term average”.

Howard Archer, chief economic adviser to the EY Item Club, hailed it as a “reasonably reassuring survey after a tepid January that points to the services sector performing pretty solidly”.

Archer added: “It is particularly encouraging to see new business growth improving to a nine-month high, although demand for consumer services remains pressurised by squeezed purchasing power”.

The services sector had previously been grappling with rising costs, prompted by higher input prices – including raw materials – caused by sterling’s slump after the Brexit vote.