Influential survey offers hope Bank of England may cut interest rates in August

Tentative signs emerged today that the Bank of England could be ready to cut interest rates in August, as an influential business survey suggested that the service sector may finally be cooling down.

The S&P Global Flash United Kingdom PMI survey for May showed that prices charged inflation fell to its lowest level since February 2021. The decline was mostly driven by slow services inflation, as businesses aimed to undercut rivals on price.

A slowdown in the pace of price rises in the service sector would be a crucial milestone for the Bank of England’s Monetary Policy Committee as it considers when to cut interest rates. Even though the headline rate of inflation is close to the Bank’s 2% target, policymakers in Threadneedle Street have said the pace of price rises in the service sector is still uncomfortably high. In April, services inflation was still 5.9%, figures from the ONS showed yesterday. That figure appeared to take a June interest rate cut off the table.

But  Chris Williamson, chief business economist at S&P Global Market Intelligence, said the survey suggests the impact of minimum wage rises in April did not carry over into May.

He said: “The survey brings welcome news of a cooling in service sector inflation, which is needed to open the door for the Bank of England to start cutting interest rates. A temporary surge in wage-related cost growth seen in April is showing signs of fading in May. 

“Firms are also reporting that strong competition is limiting their scope to raise prices, especially in the face of weakened demand due to the elevated cost of living.”

“With companies now reporting the slowest price growth in over three years, and headline inflation falling close to target, the PMI data support the view that the Bank of England will start cutting interest rates in August providing the data continue to move in the right direction over the summer.”

The PMI reading for May also showed  growth in the service sector slowing, another sign that the Bank of England’s interest rate hikes are having their intended effect. 

Meanwhile, the manufacturing sector grew at the fastest pace in almost two years, ending a long stretch in the doldrums.

That  led to a combined reading of 52.8, down from April’s 54.1. Any figure above 50 means the economy is growing.