UK’s recovery puts pressure on governor

BRITAIN’S services industry grew at the fastest rate since 2006 last month, a survey revealed yesterday, casting fresh doubt on the Bank of England’s commitment to keep interest rates on hold for the next three years.

The Markit services purchasing managers’ index (PMI) for August came in at 60.5, sending the overall reading for the British economy soaring to its highest level since 1998, hitting 60.7, both well above the crucial level of 50, which indicates rising business activity.

The news adds to a mounting body of evidence that the British economy is growing at some speed, posing problems for Bank of England governor Mark Carney. The Bank has agreed not to consider raising rates until unemployment drops below seven per cent, which it expects to come in 2016.

“The market is disregarding Carney’s comments and instead focusing on the fundamentals, which are showing a clear improvement in the UK’s economic prospects,” said Kathleen Brooks, research head of Forex.com.

A trade-weighted index of the pound rose up to its highest point since January after the data came out.

“We expect the [Bank] to be forced into tightening monetary policy well before the third quarter 2016 date they are currently suggesting is the earliest point (that) policy tightening will start,” said James Knightley at ING.

With construction at a six-year peak, and manufacturers indicating the best climate for work since early 2011, the economy’s biggest sectors seem to have been strong through the summer.

But when the Bank publishes its latest decision on interest rates at noon, analysts expect a 54th month at 0.5 per cent.

Deutsche Bank’s George Buckley raised his growth forecast for the third quarter to one per cent, adding that such robust PMI figures could signal an even larger expansion.

Visa Europe also reported the biggest monthly rise in consumer spending for nearly a year in August yesterday, giving weight to the notion of consumer-led growth. But despite the spike in optimism and output seen from the UK’s services, the unemployment balance remained modest, and dropped from July. A score of 50.6 only indicates a small rise in intentions to hire.