Strengthening economy beefs up case for an interest-rate rise

The Bank of England is still on course for its first interest rate rise in a decade after the biggest chunk of the UK economy picked up the pace last month.

The Chartered Institute of Procurement & Supply’s latest activity index, where a score over 50 signals expansion, edged up from 53.2 to 53.6 last month — far from the warning signs that might prompt an about-turn by Threadneedle Street’s rate-setters at November’s meeting.

But the modest improvement in growth across the broad-based services sector — accounting for around 80% of the overall economy — was tempered by flagging business confidence, which remains close to six-year lows. Workloads are, meanwhile, growing at the slowest pace since the aftermath of the referendum last year while cost pressures hit a seven-month high.

Chris Williamson, chief business economist at survey compiler IHS Markit, said the combination of inflation pressure and sluggish growth “presents a dilemma for policymakers”. He added: “The rise in price pressures will pour further fuel on expectations that the Bank of England will soon follow up on its increasingly hawkish rhetoric and hike interest rates. However, the decision is likely to be a difficult one.”

Bank of England Governor Mark Carney has all but confirmed that the monetary policy committee will vote for a rate rise in the “coming months” after a majority of the nine-strong committee backed the move.

The Cips survey suggests yet another quarter of tepid 0.3% growth in the July-September quarter, although Capital Economics’ senior UK economist Paul Hollingsworth said this was no barrier to the first rise since July 2007.

“Given that this is in line with the Bank of England’s projections, it shouldn’t prevent the MPC from pressing ahead and raising interest rates in November,” he added. The pound added 0.23 cent to $1.3271 following the figures.