Solid UK services survey helps justify interest rate hike

A day after the Bank of England raised interest rates for the first time in a decade, a closely watched survey shows the British economy in relatively good health.

In a monthly update published Friday, financial information firm IHS Markit found a "marked and accelerated" rise in output in services, a sector that dominates the economy.

The firm said Friday that its purchasing managers' index for the services sector rose to a six-month high of 55.6 points in October from 53.6 in September, with business activity supported by higher orders and resilient client demand. Anything above 50 indicates expansion and the October reading points to healthy quarterly growth rate of 0.5 percent.

Chris Williamson, chief business economist at IHS Markit, said the survey provides "some justification" for Thursday's hike but cautioned that the outlook remains fragile largely because of uncertainty related to Britain's exit from the European Union. He noted other findings within the survey, including a slowdown in the rate of job creation to a seven-month low and waning confidence about future growth prospects.

"A downturn in business optimism about the year ahead, fueled mainly by Brexit-related uncertainty, suggests that risks are tilted to the downside as far as future growth is concerned," Williamson said. "Not surprisingly, employment growth slowed for a second successive month as the business mood grew more cautious and risk averse."

The Bank of England's main motivation in raising its main interest rate by a quarter-point to 0.5 percent was to contain inflation. Running at an annual rate of 3 percent, inflation is a full percentage point above the bank's target.

But inflation's recent rise has been fueled largely by factors external to the country. A sharp fall in the value of the pound since last year's Brexit vote has pushed up import prices, while a rise in global oil prices has made energy more expensive.

IHS Markit's survey suggested that firms raised prices at an increased rate in October, but that the increase in costs eased, which may take the pressure off the Bank of England to raise rates further.

Few in the markets think that another hike is imminent, at least until some of the uncertainty surrounding Brexit is lifted. On Thursday, Bank of England Governor Mark Carney said a swift resolution of Britain's trading relationship with the other 27 EU nations after Brexit day in March 2019 would "prompt a reassessment of the economic outlook."

There is mounting pressure on the government to provide businesses with some clarity on the future. Many financial firms, for example, have threatened to start implementing contingency plans to set up operations in Europe or move staff and activities in the early months of next year if there is no progress in the Brexit talks.