Positive PMI boosts sterling

STRONGER-than-expected figures on the UK service sector yesterday caused the pound to rise to its highest level against the dollar and the euro for nine months and reduced the chances that the Bank of England will opt to engage in a second round of quantitative easing to boost the economy.

The purchasing managers’ index (PMI), which measures activity at UK service sector companies, beat expectations that it would fall to 52.5 by rising to 53.2, up from 52.8 in September. It was the highest level for the PMI since June, although the sector has lowered its expectations for the coming months because it is worried about the effect of government spending cuts.

Employment in the sector, which accounts for three-quarters of the UK economy, may have slightly reduced, said the report. Sterling jumped 0.5 per cent on the news, to $1.6128 against the dollar and £0.8705 against the euro.

The strong figures come on the back of last week’s third-quarter GDP results which showed the economy had grown by 0.8 per cent. Together these have reduced fears of a double dip recession in the UK and mean that the Bank of England will almost certainly not follow the Fed’s lead and opt for a second round of quantitative easing at its Monetary Policy Committee (MPC) meeting on Thursday.

Howard Archer at IHS Global Insight, said: “We suspect that the resilience of growth in the third quarter and decent survey evidence for October will convince most MPC members that there is no need at this stage at least to provide further support to the economy.”