An unexpected fall in inflation in January as well as comments made by three members of the BoE’s Monetary Policy Committee fuelled speculation that the next base rate move would likely be a reduction, with Jonathan Haskell and Michael Saunders voting for a cut consistently since November.
Saunders said the UK’s continued “sluggish” economic growth was one of the deciding factors towards a cut, however the recent PMI results suggest this may no longer be the case.
Frances Haque, Santander UK chief economist, said: “The January flash PMIs were stronger than expected with increases across manufacturing and services pushing them back into growth territory.
“Along with the positive labour market data released earlier this week and the more buoyant survey data from RICS, Deloitte and CBI, this will give the MPC members room to delay a cut until further data is released for the beginning of the year.”
Andy Scott, associate director at JCRA, added: “UK economic data this week has shown a better than expected recovery following the outcome of last month’s election, making a rate cut next week less likely.
He also said the data pointed to a “significant pick up” in UK business optimism and consumer confidence following the Conservative election win.
“We expect this is likely to mean that the Bank of England keeps rates on hold next week, preferring to wait and see whether the economy is starting to reverse the weakening growth trend,” he said.
Economic factors pointing to rate hold
Peter Izard, business development manager at Investec, said: “The latest PMI data along with the other forecast this week from the International Monetary Fund now leads to a less likely base rate cut.
“All the recent economic factors point to a positive trajectory for the economy and the Bank of England may wish to take a hold and wait stance in the months to come before making its next choice.”
The flash IHS Markit/CIPS composite PMI data suggested the growth seen in January was driven by a “sharp increase” in new work within the service sector as its business activity index rose to 52.9, up from 50.0 in December.
Furthermore, manufacturing output was at an eight-month high of 49.8, up from last month’s 47.5.
The report said reduced political uncertainty following the general election had a “positive impact” on business and consumer spending decisions at the start of the year.