UK business perks up after election, weakening case for rate cut - PMIs

Earlier signs of weakness in the labour market had prompted two BoE rate-setters to vote for lower borrowing costs in 2019

British companies are enjoying their best month in more than a year, a survey showed on Friday, the strongest evidence yet of a post-election boost to the economy that could deter the Bank of England from cutting interest rates next week.

The 'flash' early readings of the IHS Markit/CIPS UK Purchasing Managers' Index (PMI) showed Britain's vast services sector returned to growth in January for the first time since August, while a downturn in manufacturing eased.

Britain's performance bettered the euro zone's for the first time since December 2018, as the PMI suggested the world's fifth-largest economy looked on track to grow around 0.2% in quarterly terms after it slowed to a crawl late last year.

Earlier signs of weakness in the labour market had prompted two BoE rate-setters to vote for lower borrowing costs at the end of last year. Three others, including Governor Mark Carney, have hinted recently that more economic stimulus might be needed.

BoE to cut rates

Bank of England Reuters

But Friday's figures are likely to prompt investors to curb bets that the BoE will cut rates next Thursday, corroborating earlier signs that uncertainty among businesses and consumers has been tempered by Prime Minister Boris Johnson's landslide victory last month.

The composite PMI, which combines manufacturing and services indexes, rose to 52.4 from 49.3, the highest reading since September 2018 and easily beating the 50.6 consensus forecast in a Reuters poll of economists.

The services PMI rose in January to 52.9 from 50.0, also its highest level since September 2018 and well above the consensus forecast in a Reuters poll of 51.0.

Service-sector optimism hit its highest in nearly five years this month, chiming with other business surveys from the Confederation of British Industry and Deloitte.

"It seems likely that the rise in the PMI kills off the prospect of an imminent rate cut by the Bank of England, with policymakers taking a wait-and-see approach as they assess the performance of the economy in the post-Brexit environment," IHS Markit chief business economist Chris Williamson said.

UK business

Still, the services PMI remained at levels historically associated with additional stimulus from the BoE and a long way below the survey's long-run average of 54.8.

The reading for British factories was also better than expected, rising to 49.8 from 47.5, the highest level since April.

While the PMI signalled the ninth month of contraction for manufacturing, which accounts for 10% of economic output, new orders increased for the first time since April.

"The uplift in sentiment about the outlook hints at even better growth to come, but confidence needs to continue to rise to ensure this solid start to the year has legs," Williamson said.