Services boom is a quandary for the Bank of England

Hugo Duncan
4 Nov 2009

Britain moved a step closer to the end of recession today as the Bank of England grappled with how to secure a lasting recovery.

A survey by the Chartered Institute of Purchasing and Supply (CIPS) showed the services sector which drives the economy expanded at its fastest rate for more than two years last month.

The index of activity, where anything above 50 represents growth, rose from 55.3 in September to 56.9 in October, the strongest reading for 26 months.

The pound jumped against other major currencies on hopes the UK economy is at last on the mend.

It came as the Bank's nine-strong monetary policy committee (MPC) met on Threadneedle Street to decide if the £175 billion of new money it has already pumped into the economy is enough.

City economists are split over whether the Bank will leave the quantitative easing (QE) programme unchanged or raise it by £25 billion to £200 billion or by £50 billion to £225 billion.

It will announce its decision at noon tomorrow.

Brian Hilliard of Société Générale said the “storming” CIPS numbers “cement the view that we will get a recovery in the fourth quarter” following the shock 0.4% slump in the third.

Hilliard said: “Clearly this does change the balance of risks for the Bank decision. It's going to be a very close call.”

Hetal Mehta, at the Ernst & Young Item Club, said the fourth quarter “started with a bang” but warned “the recovery will be slow and fragile”.

The UK has been in recession since April last year — a record six consecutive quarters — and inflation has fallen to 1.1%. The Bank has slashed interest rates to a record low of 0.5% and is printing money through QE to stimulate growth and stave off deflation.

Philip Shaw of Investec predicted no change to QE by the Bank tomorrow.But Ross Walker of RBS said this would be a dangerous call.

“A policy shock would just cause confusion,” he said. “The market is looking for at least £25 billion more and if they don't deliver it they risk an adverse market reaction.”

Vicky Redwood of Capital Economics said: “The report on services provided further evidence that the economy will pull out of recession before the year is out. But this is unlikely to stop the MPC from extending its programme of QE at tomorrow's meeting.”

CIPS chief executive David Noble said the strong performance by the services sector — which includes banks and stockbrokers, restaurants and hotels — “bodes well” for a wider pick-up. It was the sixth-successive month of growth although this has not been mirrored by official figures which showed the sector declined by 0.2% in the third quarter.

Noble said: “The service sector is pulling the UK economy out of recession as its own recovery accelerates.

“But we can't forget that these are rocky times.”