An August rate rise seems highly likely amidst reports that the UK’s services sector, which accounts for 80% of GDP saw activity rising faster than expected. The services sector has had its fastest rise since last October.
The IHS Markit/CIPS services Purchasing Managers’ Index (PMI) unexpectedly rose to an eight-month high of 55.1 in June, beating economists’ average forecast in a Reuters poll for it to remain unchanged at 54.0. Any reading above 50 indicates an expansion rather than a contraction.
It estimated that UK gross domestic product (GDP) rose by 0.4% in the three months to June, compared with a 0.2% rise in the first three months of the year.
The pound rose to $1.3201, a five-day high, from $1.3176 and away from 2018 lows hit last week of $1.3050 and the pound was up 0.2 percent against the euro at 88.18 pence.
Chris Williamson, IHS chief business economist said the reading added to signs that the economy rebounded in the second quarter.
He said it “opens the door for an August rate hike”. Mr Williamson added, “The sharp rise in business costs, linked to surging oil prices and the need to offer higher wages, suggests inflation will also pick up again from its current rate of 2.4%.”
“Nonetheless, there were again reports that Brexit-related uncertainty had held back business investment, particularly in relation to spending by large corporate clients.”
Naeem Aslam, chief markets strategist at Think Markets UK said, “The momentum continues for the British economy, the services PMI data has lifted hopes that the Bank of England will raise rates sooner rather than later
Markets are pricing in an 88-percent chance of a single 25-basis-point increase by the end of 2018 and a 53-percent chance of an August rate hike.
Howard Archer, an economist with the EY Item Club, said: “The improved services survey completes an overall stronger set of purchasing managers’ surveys pointing to the economy warming up in June.”
A member of the Bank of England’s Monetary Policy Committee (MPC) told CNBC on Tuesday that the Bank of England (BOE) might surprise markets with a faster increase in interest rates than is currently expected.
Market players have priced in a little bit more than one rate hike over the next 12 months. But, according to the BOE’s Michael Saunders, this might be too cautious. He said, “If the economy plays out as I expect, it may be that rates need to go up a little faster than that.”
Mr Saunders added, “My expectation, conditioned on Brexit unfolding in sort of a smooth and gradual way, the economy will continue to grow at around the pace we have seen over the last couple of years, I expect the jobless rate to fall a little further; and pay growth will pick up a bit. Against that background, I think that yes, rates might need to rise a little faster.”
However, Saunders highlighted that even if rates go up at a faster pace than markets expect, this will be done in a gradual way. “The general picture is still limited and gradual, not too far and not too fast,” he said.
He continued saying “The UK.’s a very globalized economy, large exporter, and also has large foreign direct investment in the UK and so swings in global growth have a big effect on the UK. If you were to get a retreat from freer global trade that also could affect the UK. growth outlook.”
However, he pointed out that, to date, the data has been positive and there are yet no signs that rising tensions in global trade have dented the U.K. economy.
“So far, in the surveys of export orders, it looks as if what we’ve seen externally is not significantly, not having a major effect, on UK. export growth. But clearly it’s a thing which we are keeping a close eye on.”