U.K. Services Surge at Fastest Pace in Eight Months

U.K. services strengthened more than economists forecast last month and wages picked up, in a report that may push some Bank of England policy makers closer to seeking an interest-rate increase.

Markit Economics said its Purchasing Managers’ Index for services, the biggest part of the economy, jumped to 59.1 from 57.7 in June, exceeding the median forecast for a reading of 58. That’s the highest since November and the 19th straight month above the 50 level that divides expansion from contraction.

The survey points to continued strength in the economy at the start of the third quarter after it expanded 0.8 percent in the three months through June. As the BOE’s Monetary Policy Committee prepares for its two-day meeting beginning tomorrow, the report also showed input costs rising, with salaries the main factor.

“The vast services economy’s growth surge shows no sign of abating,” said Chris Williamson, chief economist at Markit in London. “The sustained strength will add to calls for interest rates to start rising later this year.”

The services index covers industries including banking, communication, computing, and hotels and restaurants.

The pound rose against the dollar after the report and traded at $1.6873 at 10:51 a.m. London time, up 0.1 percent from yesterday. U.K. government bonds fell for the first time in three days, with 10-year gilt yields rising 2 basis points to 2.56 percent.

Economic Outlook

Markit said it expects Britain’s economy to grow about 0.8 percent again this quarter if the services index, along with its manufacturing and construction gauges, hold their current levels this month and next. A composite index covering all three industries rose to 58.8 in July from 57.9 in June.

In the euro area, Markit’s composite of services and manufacturing rose to 53.8 in July from 52.8 in June, less than initially estimated.

All 47 economists in a Bloomberg News survey forecast the BOE will keep its key interest rate at a record-low 0.5 percent on Aug. 7. While policy makers have pledged to hold the rate until more slack in the economy is used up, they said last month that the potential threat to the recovery from higher borrowing costs has eased.

The MPC will have new economic and inflation forecasts at its meeting this week, which it will publish on Aug. 13.

With uncertainty about the level of slack in the economy, the committee said in July there’s an argument for putting “more stress on the expected path of costs, particularly wages, in assessing inflationary pressures.”

In its report today, Markit said input-cost inflation was a “little firmer” last month, with survey responses showing higher salaries were the “principal driver.”

Still, there was “little movement” in prices charged by companies in July. Williamson said the “absence of inflationary pressures means there is still a strong case for any tightening of policy to be delayed until 2015.”

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