Dimming UK services growth raises questions over BoE hike

LONDON (Reuters) - Growth in British services companies slowed in July by more than expected, raising further questions about the Bank of England’s decision to raise interest rates before Brexit, a survey showed on Friday.

FILE PHOTO: A man takes a photograph of the Canary Wharf financial district from Greenwich Park in London, Britain, January 22, 2017. REUTERS/Hannah McKay/File Photo

The IHS Markit/CIPS UK Services Purchasing Managers’ Index (PMI), a closely-watched gauge of economic activity, dropped to a three-month low of 53.5 in July from 55.1 in June.

Although staying comfortably above the 50 mark signifying growth, July’s score was weaker than all forecasts in a Reuters poll of more than 30 economists.

Some companies in the survey attributed the slowdown to a summer heat wave and soccer’s World Cup, which kept consumers away from their businesses.

There were also signs that uncertainty around Brexit had held back new business.

Earlier on Friday, BoE Governor Mark Carney warned that Britain faced an “uncomfortably high” risk of leaving the European Union with no deal. His comments drove sterling to an 11-day low against the dollar.

The survey comes a day after the BoE raised interest rates to a new post-financial crisis high of 0.75 percent in part because it took the view that the economy had recovered momentum after a weak start to the year caused by unusually bad weather .

Business groups were critical of the decision, and Friday’s PMI — which BoE officials typically get in advance of their policy decision — will do nothing to assuage their concerns.

“A disappointing survey all round,” said Howard Archer, chief economic adviser to the EY ITEM Club consultancy. “(It) fuels concern over the outlook for the economy and it reinforces belief that it will be some considerable time before the Bank of England raises interest rates again after Thursday’s hike.”

The services PMI is now below its long-term average of 55.1 and some way off levels previously associated with rising interest rates.

“The service sector moved back into the slow lane in July as business activity growth lost momentum for the first time since the start of spring,” Tim Moore, associate director at PMI compiler IHS Markit, said.

Services companies hired staff in July at the weakest pace in just under two years.

“Tight labour market conditions and rising wage pressures are also a key challenge for service sector companies, which contributed to the slowest pace of job creation since August 2016,” Moore said.

The BoE has said it expects wages will rise more quickly and increase inflationary pressure.

IHS Markit’s all-sector PMI, which includes services as well as the manufacturing and construction sectors, fell to 53.8 in July from 55.0 in June.

Graphic by Andy Bruce, editing by Larry King

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