(Bloomberg) --
U.K. services companies rebounded more quickly than anticipated in February as coronavirus restrictions were lifted, according to a report that will pile pressure on the Bank of England to ramp up interest rates next month.
The travel, leisure and entertainment industries roared back to life after spending was hit by the omicron outbreak in January, the survey of purchasing managers by IHS Markit showed. An index of services-sector activity soared by 6.7 percentage points to 60.8, the highest for eight months and well above the 55.5 median forecast in a Bloomberg survey.
The resurgence was accompanied by intensifying inflation pressures, with costs rising at the second-fastest pace on record and services firms hiking prices in response. Traders are fully pricing in a 25 basis-point interest-rate increase when the BOE next meets in March, with the strong possibility of a 50 basis-point move, a scale unprecedented since the BOE gained independence in 1997.
“The odds of an increasingly aggressive policy tightening have shortened, with a third back-to-back rate rise looking increasingly inevitable in March,” said Chris Williamson, chief business economist at IHS Markit.
With headline inflation at a 30-year high and forecast to top 7% in April, more than triple the BOE target, policy makers are expected to deliver a series of rate rises that will see benchmark borrowing costs hit almost 2% by the end of the year. Markets are pricing in a half-point increase at one of the next two meetings.
The performance of the services industry is crucial because it makes up around 80% of the U.K. economy. The manufacturing sector had a less spectacular month, with an index of activity remaining at 57.3. That still implies a healthy rate of expansion, and the reading was slightly stronger than economists forecast.
Williamson said questions remain about whether the economy can sustain the revival, with the cost of living crisis escalating and the risk of conflict between Russia and Ukraine hanging over the economy and markets. “Downside risks to the demand outlook have risen,” he said.
The PMI reports published Monday showed:
- A composite index of activity across services and manufacturing jumped to 60.2, the highest since June 2021. Business expectations rose in both sectors
- New order growth in the services sector rose at the fastest pace in eight months; businesses services also saw “robust” demand
- Weaker employment growth in manufacturing acted as a drag on activity but output strengthened, help by raw materials becoming more available
- Delays caused by supply-chain disruptions were the least widespread since November 2020
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