UK services growth strengthens case for Bank of England rate rise

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UK services growth and rate rise

Highlights

S&P Global's October services PMI rises to 52.8 from 52.1, showing the fastest sector expansion since February and a rebound in new orders.
UK consumer price growth climbs to 3.5% in September from 3.1%, reinforcing expectations that the Bank of England will raise its rate by 0.25 points to 4% this week.
Financial markets anticipate up to three further Bank of England rate hikes, while eurozone inflation reaches 4% in October, boosting prospects of an ECB rate rise in December.

October survey points to stronger activity and prices

As reported by The Guardian, citing S&P Global, its October services purchasing managers' index rose to 52.8 from 52.1 in September, signalling a faster expansion across the sector. The survey indicates that businesses recover much of the momentum lost after the start of the Iran war, while also facing a renewed rise in input cost inflation to a five-month high.

A reading above 50 indicates expansion, and S&P Global says service providers report the fastest upturn in activity since February alongside a solid rebound in new orders. Bigger workloads also prompt firms to hire additional staff in October, ending two years of continuous job cuts across the sector.

Tim Moore, economics director at S&P Global Market Intelligence, says the latest services and manufacturing surveys underline strong price pressures and reinforce expectations of tighter monetary policy. He says the data point to greater economic resilience despite geopolitical tensions, elevated costs and weak consumer confidence, with stronger workloads linked in part to AI-related investment spending.

Rate outlook and uneven sector impact

Officials at the Bank of England become more concerned about inflation after consumer price growth rises to 3.5% in September from 3.1% in August. A majority on the nine-member monetary policy committee is expected to back a 0.25 percentage point increase on Thursday, which would take the benchmark rate to 4%.

Financial markets price in three further increases in borrowing costs, although many City economists expect inflation to peak in the spring next year, potentially limiting any additional moves to one or two. Matt Swannell, chief economic adviser at the Item Club, says official data also point to a surge in IT and professional services activity, helped by rapid AI adoption and demand tied to datacentre construction.

He warns, however, that business-facing strength is not matched on the high street, where weaker consumer confidence continues to weigh on customer-facing services. Rob Wood, chief UK economist at Pantheon Macroeconomics, says firms appear to absorb some higher costs, but not enough to avoid a rate rise, with underlying services inflation still running above a level likely to satisfy policymakers.

Elsewhere in Europe, eurozone inflation rises to 4% in October from 3.8% in September, increasing the likelihood that the European Central Bank raises rates in December after leaving borrowing costs unchanged last week.

In our earlier article on economists shifting toward a November Bank of England rate hike, we noted that persistent inflation pressures and firmer UK data were pushing expectations toward a 25-basis-point move to 4.0%. The piece also highlighted that, while the recent energy shock had been absorbed better than initially feared, policymakers still saw inflation and market volatility as key risks that could keep policy tightening on the table.

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