June 7, 2012 / 8:41 AM / 7 years ago

Services growth raises stimulus doubts as BoE meets

LONDON (Reuters) - Britain’s dominant services sector grew at an unexpectedly steady pace in May and retailers saw a solid bounce-back in sales, reducing the chance the Bank of England will announce more economic stimulus at its meeting on Thursday.

A doorman closes a taxi door outside a hotel in central London September 5, 2011. REUTERS/Toby Melville

The overwhelming majority of economists polled by Reuters last week expected the Bank to keep policy intact, although at least two major banks have changed their forecasts since the release of a far weaker-than-expected factory survey on Friday.

However, the Markit/CIPS purchasing managers’ services survey supported the consensus view, with its headline activity index remaining unchanged at 53.3 in May. It beat expectations for an easing to 52.5 and caused British government bond prices to reverse gains.

“We suspect that the BoE will choose to hold fire until after the Greek elections and will keep further stimulus in reserve should markets become dysfunctional,” said James Knightley, economist at ING.

Last month the Bank decided not to raise its 325 billion pound target for asset purchases, ending seven months of gilt buying as part of its quantitative easing programme. The Monetary Policy Committee’s vote was 8-1 to stop purchases, although for some members that decision was “finely balanced”.

Since then, official data has shown that Britain’s economy contracted slightly more than first estimated. And May’s manufacturing PMI reading dropped to a three-year low, giving economists pause for thought because recently the Bank has focused more on such private-sector surveys than on official figures.

But overall retail sales rose 3.4 percent on the year in May as warm, sunny weather tempted shoppers to buy summer clothes and food and drink, the British Retail Consortium said.

Another survey from manufacturing lobby EEF showed that companies expected output and orders to rise in the coming three months, although the organisation cut its production forecast for 2012 after a weak start to the year.

Together with the services PMI, the surveys tempered QE bets, though the BoE’s decision due at 1100 GMT is still likely to be a tough one.

A breakdown of the services PMI painted a mixed picture of the sector.

Even though the new business index rose to 54.8, its highest since January, business expectations were at their lowest since December as firms fretted about public sector spending cuts and the euro zone debt crisis.

And the headline activity index, though remaining above the 50-point level that separates expansion from contraction, is still 3-4 points below its long-run average before the financial crisis.

Moreover, the composite PMI index, which combines the manufacturing, services and construction sectors, fell almost a point to 52.3 in May.

Additional reporting by David Milliken and Sven Egenter

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