Sector figures may put QE on the backburner

The Markit/CIPS Purchasing Managers’ Index (PMI) rose to 51.8 last month, up from 51.5 in January and beating forecasts of 51.0.

The figures improved sentiment after an unexpected fall in factory activity last week and the weakest construction PMI in over three years, which had raised fears that the UK was headed for a triple-dip recession.

Sterling rallied against the dollar on the news, following doubts that the Bank of England will launch another round of quantitative easing (QE) this week.

Vicky Redwood, chief UK economist at consultancy Capital Economics, said the figures could well be the “decisive factor” that ensures the Bank of England’s Monetary Policy Committee (MPC) opts not to re-start its asset purchase – or money-printing – programme on Thursday.

“Had the survey fallen sharply, those on the MPC wanting to do more quantitative easing might have mustered a majority,” she said.

“But the rise in the services activity balance probably tips the balance towards the MPC doing nothing – especially following the solid high street spending figures released by the BRC overnight.”

Activity in the services sector, which accounts for 77 per cent of wider UK economic output, was boosted by growing levels of new business. Confidence levels and the rate of new jobs created both hit nine-month highs.

Economist Ross Walker, at Royal Bank of Scotland, said: “The market was poised for a weaker number, following the manufacturing and construction figures, and everyone was going to leap on this ‘more QE on Thursday’ band-wagon, but I’m struggling to see what the pressing need for more QE is.”

In further upbeat news, the British Retail Consortium reported the strongest sales growth in almost two years in February, boosted by a greater number of house purchases driving demand for furniture, homewares and expensive electrical goods.

Markit said confidence among services firms continued to improve, with optimism about future business activity hitting a nine-month high of 67.6, a fraction up on January’s 67.2.

The survey covers transport, storage and communication, financial intermediation, business services, personal services, computing and IT, and hotels and restaurants.

The Bank of England’s top policymakers meet on Wednesday and Thursday to decide whether to boost the economy further, having already spent £375bn on Government bonds.

Economists had been split on whether the Bank of England would opt for more QE.

Jamie Searle, gilts strategist at Citi, said: “At the end of last week the market was betting that a QE increase was more likely than not.

“Today’s services data has put some doubt in people’s minds.”

Marchel Alexandrovich, at Jefferies, said: “Had the services PMI come in below 50, another £25bn of QE would have been pretty much a done deal.

“The slightly better number means the debate now is whether the Bank of England can wait until April and May, and make a decision when they have more information on the fiscal side of things from the budget.”

The Budget will be announced on March 20.

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