Prospect of UK interest rate rise dims as service sector struggles

Britain’s services sector struggled to bounce back in April from the big freeze in March that brought the economy to a grinding halt, increasing the likelihood of the Bank of England holding interest rates at 0.5% next week.

Services firms reported the third lowest level of business activity since the EU referendum in 2016 to defy City economists, who expected a stronger recovery from the cold weather in March.

Firms that sell services to consumers were the worst affected, notably hotels and restaurants. The strongest expansion was seen in financial services.

The balance of responses from firms across the sector left the Markit IHS purchasing managers index (PMI) at 53.2, up from 51.9 in March, but much lower than the 54.2 in February. A figure above 50 indicates expansion.

Chris Williamson, chief business economist at IHS Markit, said: “Services growth accelerated but, after March’s low, was the second-weakest for over one-and-a-half years.”

He added: “The weak services data follows news that manufacturing lost further momentum in April, with output rising at the second-slowest rate for just over a year. The brightest news came from the construction sector, which saw the largest monthly output rise since November, albeit after an especially sharp decline in March.”

Paul Hollinsworth, UK economist at Capital Economics, said the weakness of the rebound in April would “do little to assuage fears that the economy has suffered a loss of underlying momentum and makes the chances of a rate hike next week extremely slim”.

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Threadneedle Street policymakers meet on 10 May to judge the state of the economy and decide whether to increase interest rates for only the second time since the 2008 financial crash.

Several members of the central bank’s rate setting committee indicated in the early part of the year that they were ready to increase the cost of borrowing and several mortgage lenders increased the cost of their two-year fixed rates loans in response.

But the likelihood of a rise has receded following a series of weak economic indicators, forcing lenders to revise their outlook.

IHS Markit PMI, which covers around 40% of the services sector and excludes high street shops, found that the rate of employment growth, sales and investment were hit by uncertainty about the economic outlook as well as sluggish domestic demand from among consumers.

However, it said optimism about the next 12 months had increased. “The balance of companies expecting a rise in business activity over the year ahead reached its highest level since January. This was attributed to forthcoming product launches, new marketing plans and discounting strategies,” it said.