Strong UK services boost sterling

Image caption,
Service sector employment slipped in October, despite the higher level of activity, the survey found

The UK service sector grew more strongly than expected in October, a survey has found, boosting the pound.

The purchasing managers' index (PMI) of activity at UK service sector companies rose to 53.2 last month, up from 52.8 in September, and beating expectations of a fall to 52.5.

Sterling rose by about 0.5% after the release, to $1.614 and 1.148 euros.

The strong data diminishes remaining hopes the Bank of England may announce further monetary stimulus on Thursday.

Less optimistic

The PMI services index - produced by data services company Markit - registered its highest level since June. Any level above 50 indicates expansion of the sector.

The survey also found evidence of growing price pressures within the sector, which represents about 75% of the UK economy.

Despite the apparently robust performance in October, service companies lowered their expectations somewhat for the coming months amid concern over the impact of government spending cuts.

Employment in the sector may also have shrunk slightly in October, the report said.

"October's survey suggests a modest improvement in service sector growth," said Markit's senior economist, Paul Smith, who compiled the survey.

"The latest data suggest that the sector is set to make a below par contribution to GDP in the coming months."

Feeling QEasy

The Bank of England's monetary policy committee will meet this week in the wake of the expected announcement by the US Federal Reserve later on Wednesday of a new round of quantitative easing ("QE") - printing money to buy up government debts - in America.

However, expectations that the Bank will follow the lead of its US counterpart have been largely eliminated - at least for the time being - thanks to a string of strong economic data.

"In terms of policy, [the new service sector survey] reaffirms what we already knew," said Peter Dixon, UK economist at Commerzbank.

"There's absolutely no need for the Bank of England at this stage to engage in any further quantitative easing, and they're very much on hold for the foreseeable future."

Last month, it was revealed that the UK economy grew a much-faster-than-expected 0.8% in the third quarter of the year.

Earlier this week, a PMI survey from the UK manufacturing sector was also much stronger than expected, although a similar survey from the construction sector pointed to a downturn in that part of the economy.

QE - or market expectations of imminent QE - tends to depress the value of a currency by increasing its supply and by reducing longer-term interest rates.

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