PRESSURE is intensifying on the Bank of England to keep interest rates on hold today as new figures reveal a slump in confidence among service sector companies.
In a report that casts doubt on the sustainability of the consumer recovery, data from the CBI and Grant Thornton show the biggest drop in business services volumes for five years.
The figures come after statistics released yesterday showed that output in the manufacturing sector is failing to keep pace with a buoyant performance in the rest of Europe’s industry. The Office for National Statistics (ONS) numbers prompted business groups to urge the Bank to peg rates.
However, other data threatened to push the Bank towards a rate rise later this year as it seeks to prevent inflation rising well above its target. The British Retail Consortium (BRC) reported that shop prices had risen at their fastest for more than two years. The BRC said that prices had risen by 1.4 per cent in the year to August, the highest such figure since May 2004.
The Bank’s Monetary Policy Committee is widely expected to keep rates on hold today, after surprising the market with a rate rise last month, but many observers predict that the MPC will raise rates again in November.
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The CBI survey suggests that growth in the service sector may fall short of the Bank’s expectations, strengthening the case for steady rates. Consumer services, a category that includes businesses such as travel agents, hairdressers and cinemas, showed a marked decline. Some 44 per cent of such firms said that business volumes were down in the three months to August compared with the previous three months, as opposed to 9 per cent who recorded an increase. The negative balance of 35 per cent was the worst such figure since November 2001.
The CBI said: “There is evidence that consumers are tightening their belts and spending less on social activities and ‘treats’, given rising household bills.”
The survey’s confidence balance for consumer services plummeted to minus 29 in August, from plus 14 in May. Business and professional services also recorded a drop in sentiment, with a balance of minus 5 last month, down from plus 18 three months before.
The ONS figures showed steady but undramatic improvement in manufacturing output, in line with expectations. Output rose by 0.2 per cent in July, up from 0.1 per cent the previous month. Industrial production, a wider measure that includes mining and oil and gas extraction, also rose by 0.2 per cent.
Yet analysts pointed to a softer message for the sector from recent purchasing managers’ surveys as evidence that industry could suffer in the months ahead.
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John Butler, of HSBC, said: “Increasingly it looks like the opportunity for a substantial manufacturing recovery looks to have passed, as confidence is waning, global demand is softening, domestically interest rates are higher and, potentially most importantly, trade-weighted sterling is higher.”