UK services PMI hits eight-month high before Bank of England decision

Rate hike to 4% expected as input-price inflation hits five-month high

UK services activity grew at an eight-month high in October, as S&P Global’s services purchasing manager’s index rose from 52.1 to 52.8. A reading above 50 indicates expansion, and input-price inflation accelerated to a five-month high. The Bank of England is expected to raise its interest rate by 0.25 percentage point to 4% on Thursday. Matt Swannell, chief economic adviser to the Item Club, said, “An interest rate hike looks nailed on at tomorrow’s MPC meeting. And today’s data only adds to the weight of evidence.”

A majority of the nine-member Monetary Policy Committee is expected to vote on Thursday for the increase. Bank officials have become concerned about inflation after the consumer prices index rose from 3.1% in August to 3.5% in September.

The committee has been split in recent months. Some members have said they are prepared to wait for more evidence, while others have indicated they will vote to quell even modest increases in prices. Financial markets expect three further increases in the cost of borrowing. Most City economists believe inflation is likely to peak in the spring of next year, allowing the Bank to limit the number of additional rate rises to one or two.

S&P Global’s survey showed businesses regained much of the momentum they lost after the start of the Iran war. Tim Moore, economics director at S&P Global Market Intelligence, said service providers indicated the fastest upturn in activity since February and “a solid rebound in new orders”. A manufacturing survey earlier in the week also showed businesses facing strong price pressures, Moore said: “These signals underscore the near-certainty of a Bank of England rate hike in November and collectively raise the likelihood of further Bank of England policy tightening into 2027.”

Bigger workloads prompted businesses in the services industry to take on additional staff in October. The hiring ended two years of continuous job cutting across the sector. During that period, many businesses said they were responding to higher labour and business costs or were not replacing employees who left.

AI investment spending helped support the stronger pipeline of sales opportunities. Moore said: “Greater workloads were attributed to an improved pipeline of sales opportunities, particularly those linked to AI investment spending.” The sector has benefited from demand for AI applications and software services associated with the boom in datacentre construction.

Cost pressures remained broad across the survey. Moore said about four in 10 businesses on the services-sector panel reported an increase in input prices, while only 1% experienced a decline. Moore said the survey suggested an “increase in economic resilience despite challenges from geopolitical tensions, elevated cost pressures and subdued consumer confidence”. Swannell said official data also pointed to a surge in activity in the IT and professional services sectors.

Swannell cautioned that growth in business-to-business services was not being matched on the high street, which he said had continued to be badly affected by a dip in consumer confidence. “With at least some of that strength reflecting businesses’ rapid adoption of AI technologies, we expect pockets of strength to sustain momentum into next year. But in a two-speed economy, consumer-facing services will come under increasing pressure as households’ spending power is squeezed,” Swannell said.

It remains unclear how much services firms will pass on higher input costs to consumers, adding to inflation. Rob Wood, chief UK economist at Pantheon Macroeconomics, said there was a sign that services businesses were absorbing costs, but not enough to prevent a rate rise. The services output price balance dropped to 56.9 from 57.8 in September. “We estimate this is consistent with underlying services inflation rising about 4.1%, down from the latest official reading of 4.4% but still too high for the MPC to stand pat,” Wood said.

Eurozone inflation rose to a three-year high of 4% last month, up from 3.8% in September, as energy and food costs surged. The increase made a December rate rise by the European Central Bank more likely after the central bank left borrowing costs unchanged last week.