Advertisement

The Boris Bounce might stop the Bank of England from cutting rates

The latest snapshot of UK economic activity has sparked a bout of inflationary talk, with both manufacturing and service sectors in ruder health than anticipated. That might have an effect on interest rates, says John Stepek.

This morning we got the most up-to-date snapshot of economic activity in the UK. And in terms of the economy at least, the news was good. The monthly PMI (purchasing manager index) surveys from IHS Markit take the temperature of private sector businesses in both the manufacturing and services industries. The company does this for most major countries, and markets view the surveys as pretty reliable early indicators of how official economic data will pan out. 

Advertisement - Article continues below

This batch was particularly eagerly awaited as it’s the first available economic data to give us a decent idea of just how much of a difference the lifting of the uncertainty of the election has made to businesses across the UK.   And the answer is that it’s definitely helped. 

In January, activity in both the manufacturing and services sectors is healthier than markets had expected. Activity in manufacturing – in common with the rest of the world – is still peaky, and shrinking slightly (although new orders are growing again). But activity in services picked up strongly. 

The outlook improved too. As Paul Dales at Capital Economics points out, demand has perked up so markedly that some companies are even talking about having “greater scope to pass on higher operating costs”. That’s inflationary talk of a nature that we haven’t seen in a long time (indeed, since well before the 2016 vote to leave the EU).  

So what does it mean for investors? It does make it a lot harder – though not impossible – for the Bank of England to justify a cut in interest rates next Thursday when the Monetary Policy Committee announces its latest decision. Markets tend to like rate cuts. 

However at this point, they’ll probably be happier that we aren’t facing imminent recession. Also, clearly more activity is good for corporate profits, which should be good for share prices, all else being equal. Meanwhile, it also implies a healthier outlook for the pound than would otherwise have been the case.

Advertisement
Advertisement

Recommended

How long can the good times roll?
Economy

How long can the good times roll?

Despite all the doom and gloom that has dominated our headlines for most of 2019, Britain and most of the rest of the developing world is currently en…
19 Dec 2019
Beyond the Brexit talk, the British economy isn’t doing too badly
Economy

Beyond the Brexit talk, the British economy isn’t doing too badly

The political Brexit pantomime aside, Britain is in pretty good shape. With near-record employment, strong wage growth and modest inflation, there is …
17 Oct 2019
Businesses must be bold if they want to survive
UK Economy

Businesses must be bold if they want to survive

It’s a difficult time for companies, but battening down the hatches is the wrong approach, says Matthew Lynn.
2 Aug 2020
How Russia’s dirty money sullies Britain
UK Economy

How Russia’s dirty money sullies Britain

Russia’s kleptocrats have grown used to laundering their money and reputations in London. The government has promised change, but how serious is it?
1 Aug 2020

Most Popular

BP has slashed its dividend – and markets love it
Income investing

BP has slashed its dividend – and markets love it

BP has bowed to the inevitable and cut its dividend in half – and its share price promptly rose. John Stepek explains what it means for shareholders …
4 Aug 2020
Listed companies are dying out, and that could have serious consequences
Stockmarkets

Listed companies are dying out, and that could have serious consequences

Private equity is taking over from public stockmarkets as the biggest provider of capital to companies. That’s bad for investors and bad for society a…
3 Aug 2020
Can the recent rally in sterling continue?
Sponsored

Can the recent rally in sterling continue?

A "double top"  – a very recognisable pattern – is forming in in the US dollar. Dominic Frisby explains what it is, and what it could tell us about st…
3 Aug 2020