Britain’s dominant services sector rebounds, cost burdens persist

Activity in Britain’s services sector grew in November after three months of declines, a survey showed on Tuesday, but companies reported an uptick in prices charged, a potential concern for the Bank of England ahead of its interest rates decision next week.

The final S&P Global/CIPS UK Services Purchasing Managers’ Index (PMI) rose to 50.9 from 49.5 in October, above the 50 threshold for growth, and stronger than the 50.5 provisional estimate for November.

When it was published last month, the stronger-than-expected preliminary reading caused bond market investors to push back when the BoE is likely to cut interest rates for the first time.

The final gauge of the services sector production was the strongest since July when it stood at 51.5.

Respondents also noted the fastest increase in prices charged since July, although the rate of inflation remained much softer than seen in the first half of the year.

“November data provided a note of caution with regard to the near-term inflation outlook as service providers signalled another round of strong input cost pressures, largely due to rising staff wages,” Tim Moore, economics director at S&P Global Market Intelligence said.

Some businesses said strong cost pressures, on the back of rising staff wages and concerns about the broader economic outlook, had led to some hiring freezes.

But overall staffing numbers in the services sector improved with the employment index rising to 50.3 last month, up from 49.2 in October and a nearly three-year low of 47.9 in September.

British firms have struggled with staff shortages despite signs that the tight jobs market was easing in the face of elevated interest rates.

The BoE, which has maintained borrowing costs at its last two meetings after 14 consecutive increases, is closely monitoring how companies set wages and prices.

The Bank’s Monetary Policy Committee is due to announce its final rates decision of the year on Dec. 14, and investors have priced in another hold in Bank Rate at 5.25 per cent.

S&P Global said some firms noted higher borrowing costs had weighed on new orders.

The composite PMI, which combines the services survey with last week’s manufacturing PMI, increased to 50.7, up from 48.7 in October and above the 50.0 threshold for the first time since July. Manufacturing remains weak but the downturn is showing signs of easing, according to last week’s PMI.