January’s stronger PMI data means Bank of England is more likely to hold rates next week

The British economy performed more strongly than expected in January, according to figures released on Friday, raising the likelihood that the Bank of England will hold interest rates next week.

In the clearest signal so far of a boost for the economy since Boris Johnson’s decisive election victory last month, the latest snapshot from IHS Markit and the Chartered Institute of Procurement and Supply (Cips) showed a decisive change of direction for the private sector economy at the start of 2020.

Business optimism soared to the highest level in almost five years, according to the survey of 1,300 manufacturing and service sector companies, amid rising hopes that an end to domestic political uncertainty will have a favourable impact for business investment and the wider economy.

The flash purchasing managers index (PMI) – a monthly snapshot of the UK economy closely monitored by Threadneedle Street for early warning signs – came in at 52.4 on a scale where any score above 50 represents growth. Last month’s figures came in below the benchmark. City economists had forecast a reading of 50.6.

Chris Williamson, the chief business economist at IHS Markit, said the survey indicated that gross domestic product (GDP) grew by 0.2% in January. “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,” he said.

More than half of the Bank’s nine-member monetary policy committee (MPC) have said they would be ready to cut interest rates from the current level of 0.75% if conditions in the economy failed to improve, after a period of flatlining growth caused by Brexit and political uncertainty.

The panel will announce its decision on Thursday, in Mark Carney’s final MPC meeting as governor before stepping down in March to be replaced by Andrew Bailey. The outgoing governor said earlier this month that prompt action to cut rates should be taken if the economy remained weak. At the last meeting, the MPC voted 7-2 to hold rates.

Buoyant jobs market eases pressure on Bank of England to cut rates Read more

Despite the jump in the PMI, some economists said the MPC’s decision still hung in the balance. Economists at Bank of America said: “[The PMI] leaves us in no-man’s land. It’s not strong enough to rule out a January rate cut but neither is it weak enough to guarantee a cut. So we are left trying to figure out what side of the bed nine rate setters will get out of next Thursday.”

The pound dropped by about 0.3% on the foreign exchanges after the PMI reading, falling to just below $1.31 against the US dollar.

Official employment data this week showed Britain’s jobs market staged a stronger than expected recovery in the three months to November, which eased pressure on the MPC to cut borrowing costs.

Job creation increased for the second month running in January, according to IHS Markit and Cips. The service sector – which includes restaurants, hotels and banks and accounts for about 80% of the UK economy – returned to growth for the first time since August.

Manufacturing output – which accounts for about 10% of the economy – remained in contraction for the ninth month in a row. However, new orders rose for the first time since April.

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Despite the rise in confidence among firms, economists have warned that business investment and growth could remain muted in 2020 if the prime minister appears to be comfortable with ending the Brexit transition in December without striking a trade deal with the EU.

Sajid Javid, the chancellor, prompted anger from businesses last weekend after he used an interview with the Financial Times to warn that Britain could shift away from EU regulations after Brexit, a move with the potential to drive up business costs.

Duncan Brock, the group director at Cips, said companies would need to closely monitor progress in the EU trade talks.

“It appears that once uncertainty around the general election was removed, domestic clients and consumers started to spend again, though exports in the service sector still suffered from indecision and a Brexit block,” he said.