U.K. Services Unexpectedly Sustains Pace of Expansion in May

U.K. service industries unexpectedly maintained their pace of growth in May and employment rose as demand increased.

A gauge based on a survey of purchasing managers remained at 53.3 from April, Markit Economics and the Chartered Institute of Purchasing and Supply said in a report today in London. The median forecast of 27 economists in a Bloomberg News survey was for a decline to 52.4. A measure above 50 indicates expansion. Confidence weakened because of concerns related to the euro-area debt crisis, Markit said.

The pound pared its decline against the dollar after the survey, which indicates some strength in the economy after data last week showed manufacturing shrank the most in three years in May. The report adds to the case for the Bank of England to maintain its target for bond purchases, James Knightley, an economist at ING Bank NV, said in a research note.

The index “has settled in a range that is a step or two down from what we used to see prior to the financial crisis, providing signs that the long-term growth rate may be shifting lower,” Paul Smith, senior economist at Markit, said in the statement. “Exceptional circumstances prevail, with the euro- zone debt crisis continuing to undermine service sector confidence. The U.K. economy remains relatively fragile.”

Price Cuts

Markit said new business at services companies rose at the fastest pace in four months, while employment increased at a “solid rate.” Sales volumes were partly supported by price cuts, it said.

The pound rebounded from a drop of as much as 0.4 percent after the report. It traded at $1.5489 as of 10:03 a.m., down 0.1 percent from yesterday. Government bonds erased gains, pushing the 10-year gilt yield up 4 basis points to 1.698 percent.

The Bank of England’s Monetary Policy Committee will keep its bond-purchase target on hold at 325 billion pounds ($503 billion) today, said 37 of 42 economists in a Bloomberg News survey. All 55 economists in a separate poll forecast that the central bank will keep its benchmark interest rate at a record- low 0.5 percent, where it’s been since March 2009. Policy makers announce the decision at noon in London.

The services gauge “didn’t fall as much as last Friday’s manufacturing PMI, which had heightened talk about QE at today’s BOE policy meeting,” Knightley wrote. “We suspect that the BOE will choose to hold fire until after the Greek elections and will keep further stimulus in reserve should markets become dysfunctional.”

To contact the reporter on this story: Jennifer Ryan in London at jryan13@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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