‘Reasonable’ UK services PMIs could postpone rate cut to 2017

Figures showing that services activity remained “reasonable” in September could mean that the Bank of England’s signal that it would cut rates before the year’s end could be postponed to early 2017, IHS Markit says.

Services business activity index softened slightly in September to 52.6 after rebounding to 52.9 in August from 47.4 in July. It is still below its long-term average of 55.1.

“September’s reasonable services survey from the purchasing managers provides maintains belief that the economy has not been derailed by June’s Brexit vote,” says IHS Markit chief economist for Europe and the UK Howard Archer.

Year-on-year services grew 2.9 per cent in July and improved 0.4 per cent month-on-month, the Office for National Statistics confirms in hard data.

Archer says this may prompt the Bank of England to postpone any rate rise to early 2017, but warned this depended on data coming through in the weeks ahead.

Archer cautions: “It is very possible that just as July’s manufacturing purchasing managers’ surveys likely overstated the weakness of activity in the immediate aftermath of June’s Brexit vote, so the August and September surveys may be overstating the bounce back in activity.”

Due to several months of positive data IHS Markit has revised its outlook for the UK economy, expecting growth to hit 2 per cent in 2016 and 1 per cent in 2017.

However, Archer warns that the impact of the weak pound is yet to hit consumers and that uncertainty will heighten as Brexit negotiations near.

“While the economy is currently holding up well, we still suspect that it will lose momentum over the coming months as uncertainty is fuelled by Article 50 being triggered by the end of March 2017 and likely very difficult negotiations with the EU increasingly come to the forefront,” Archer says.

“We also suspect that the fundamentals for consumers – which currently remain largely decent – will diminish over the coming months.

“Consumers are likely to face less favourable purchasing power as inflation rises and earnings growth is limited by companies striving to limit their costs.

“In addition, we suspect the labour market will eventually soften despite its current resilience.”