U.K. Services Downturn May Keep BOE Cautious on Interest Rates

  • Economy sinks further into a soft patch, Markit says
  • Signs of weakness come as policy makers hold rate meeting

U.K. services growth faltered in September, highlighting the fallout from global economic weakness that may push Bank of England policy makers to adopt a cautious tone when they gather for their monthly meeting.

A report from Markit Economics published in London on Monday showed that services grew at the slowest pace in more than two years in September. According to their survey last week on manufacturing, factory growth remains sluggish and prospects for the industry are poor.

The services report suggests that damage from China’s cooling and the slowdown in emerging markets is expanding beyond manufacturing, with Markit’s composite index of the economy suggest that growth slowed to 0.5 percent in the third quarter. The risks to the outlook may be reflected in the statement from the BOE’s Monetary Policy Committee after its meeting.

The BOE’s rate path risks being “blown off course by faltering data,” said Ross Walker, an economist at Royal Bank of Scotland Group Plc in London. “This notion that there is some contagion, that there is some easing in demand -- it must induce some greater caution.”

The services index of activity fell to 53.3 in September, the lowest since April 2013, from 55.6. The decline was unexpected, with economists in a Bloomberg survey forecasting an increase to 56. Howard Archer, an economist at IHS Global Insight, said the numbers will “perturb” the MPC as they prepare for their interest-rate vote.

The MPC will make its decision on Tuesday, a day earlier than usual, to allow officials including Governor Mark Carney time to fly to Lima, Peru, for International Monetary Fund meetings. The decision will be announced on Thursday and all economists surveyed by Bloomberg forecast the rate will be kept at a record-low 0.5 percent.

The pound pared its gains against the dollar after the Markit report. It was trading at $1.5203 as of 11:10 a.m. London time, up 0.1 percent from Friday. Chris Williamson, chief economist at Markit, said the index shows the economy “sank further into a soft patch at the end of the third quarter.”

The index nevertheless held above 50, the dividing line between expansion and contraction. Employment rose at the strongest level in three months, and the environment for hiring signals the slowdown has potential to be short-lived, according to the report.

Daniel Vernazza, a London-based economist at UniCredit SpA, said the report may still have altered the MPC’s view of the economy.

“Of all the softer numbers coming out of the U.K. in the last month or so, today’s services PMI report is the single most important,” he said. “We had previously said that when the MPC announces its monetary policy decision this Thursday the minutes are likely to be less dovish than the market expects, but today’s weaker services PMI means all bets are off.”

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