Expectations for a UK interest rate rise in August hardened after the services sector reported its fastest growth since last October on Wednesday, and were further buoyed by comments made by Bank of England governor Mark Carney in a speech given to the Northern Powerhouse Summit in early July.
The IHS Markit CIPS Services Purchasing Managers Index, for which a reading above 50 suggests growth, hit a high of 55.1 in June, beating widespread expectations of 54. However, the data also showed that business costs had increased.
IHS Markit chief business economist Chris Williamson says: “The survey data indicate that the economy likely grew by 0.4 per cent in the second quarter, up from 0.2 per cent in the opening quarter of 2018. The sharp rise in business costs, linked to surging oil prices and the need to offer higher wages, suggests inflation will also pick up from its current rate of 2.4 per cent.”
In his speech, Carney stated: “Domestically, the incoming data have given me greater confidence that the softness of UK activity in the first quarter was largely due to the weather, not the economic climate. A number of indicators of household spending and sentiment have bounced back strongly…. The Monetary Policy Committee [which sets the interest rate] will continue to monitor incoming data and review prospects for growth and inflation in the UK in order to set monetary policy consistent with returning inflation sustainably to target.”
The MPC held the interest rate at 0.5 per cent in May (voting 7-2 to do so), but as we reported in June, outgoing MPC member Ian McCafferty insisted that the Bank of England “should not dally” over its next move, and was one of the two members to vote for a rise of 25 basis points. Coreco Group founding director Andrew Montlake says this “provides a good indication” of future movements.
Montlake adds: “There was talk that, if GDP came in at 0.4 per cent or more, there would be a stronger case for raising rates in August, and that does seem to have happened.” However, he also warns against making assumptions, “as we’ve seen this happen in the past”, before highlighting that “England’s World Cup campaign successes may well increase the possibility of a rise”.
Regarding Carney’s comments, JLM Mortgage Services head of mortgage finance Sebastian Murphy says: “Nobody should be surprised that a rate rise is imminent as the Bank has made it very clear that this is required with Brexit looming.
“We believe it will have little to no impact on the market due to mortgage product pricing still being almost historically low.”