UK Services Growth Hits Eight-Month High Before BoE Vote
A survey of UK services firms showed activity at an eight-month high in October, helped by AI spending. That strengthens the case for a Bank of England rate rise to 4% on Thursday.
Business surveys are pushing the Bank of England toward raising interest rates on Thursday. October data showed UK services firms growing at their fastest pace since February, while the prices they pay climbed again.
Services PMI rises to 52.8
The S&P Global services purchasing managers' index (PMI) rose from 52.1 to 52.8. A reading above 50 means the sector is expanding.
Firms regained much of the momentum lost after the start of the Iran war, and new orders rebounded. Bigger workloads led businesses to hire in October. That ended two years of continuous job cuts across the sector.
S&P Global economics director Tim Moore linked the extra work to a better pipeline of sales, particularly tied to AI investment spending. Software and AI application work tied to data centre construction has added to demand.
Prices keep the Bank on edge
Input price inflation reached a five-month high. Roughly 40% of surveyed firms paid more for inputs than before, and just 1% paid less.
Inflation is the Bank's concern: consumer prices climbed from 3.1% in August to 3.5% in September. A majority of the nine-member monetary policy committee is expected to back a 0.25 percentage point rise to 4%. The committee has been split in recent months.
Markets expect three further rises. Most City economists think inflation will peak in spring next year, which would limit the extra increases to one or two. Moore said the surveys point to "near-certainty" of a November hike and raise the odds of more tightening into 2027.
It is unclear how much of the higher costs firms will pass on to customers. Pantheon Macroeconomics' Rob Wood saw signs of firms absorbing some, though not enough to stop a hike. He estimated underlying services inflation near 4.1%, down from the latest official 4.4%.
A two-speed economy
Matt Swannell of the Item Club said official data also showed a surge in IT and professional services. Growth in business-to-business services, he cautioned, is not matched on the high street, where weak consumer confidence persists.
Elsewhere, eurozone inflation reached 4% last month, a three-year high, after 3.8% in September, as energy and food prices climbed. A European Central Bank rate rise in December looks more likely.
Our view
Thursday's vote looks settled, but the vote split will carry the message. Some committee members have said they will wait for more evidence, others want to stop even modest price rises.
The harder question is the one Swannell raises: AI-driven business spending is lifting the numbers while households squeeze budgets. If consumer-facing firms weaken further, the Bank's room to keep raising rates narrows.
Source: The Guardian