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. 

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.

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
I wish I knew what negative interest rates were, but I’m too embarrassed to ask
Too embarrassed to ask

I wish I knew what negative interest rates were, but I’m too embarrassed to ask

There’s been a lot of talk from the Bank of England recently about introducing “negative interest rates”. So what on earth are they, and what would th…
20 Oct 2020
Negative interest rates and the end of free bank accounts
Bank accounts

Negative interest rates and the end of free bank accounts

Negative interest rates are likely to mean the introduction of fees for current accounts and other banking products. But that might make the UK bankin…
19 Oct 2020
The Bank of England should create a "Bitpound" digital currency and take the world by storm
Bitcoin

The Bank of England should create a "Bitpound" digital currency and take the world by storm

The Bank of England could win the race to create a respectable digital currency if it moves quickly, says Matthew Lynn.
18 Oct 2020

Most Popular

The Bank of England should create a "Bitpound" digital currency and take the world by storm
Bitcoin

The Bank of England should create a "Bitpound" digital currency and take the world by storm

The Bank of England could win the race to create a respectable digital currency if it moves quickly, says Matthew Lynn.
18 Oct 2020
Negative interest rates and the end of free bank accounts
Bank accounts

Negative interest rates and the end of free bank accounts

Negative interest rates are likely to mean the introduction of fees for current accounts and other banking products. But that might make the UK bankin…
19 Oct 2020
What would negative interest rates mean for your money?
UK Economy

What would negative interest rates mean for your money?

There has been much talk of the Bank of England introducing negative interest rates. John Stepek explains why they might do that, and what it would me…
15 Oct 2020