The BoE’s nine rate-setters unexpectedly voted unanimously to raise rates to 0.75 from 0.50 percent, the level at which they have spent most of the past decade, apart from a period after the 2016 Brexit vote when they were cut even lower.
But sterling fell against the dollar and the euro and British government bond prices rose after BoE Governor Mark Carney stressed the gradual path for rate hikes ahead.
“Policy needs to walk — not run — to stand still,” he said as he explained a new BoE estimate of neutral interest rates for Britain’s economy, which the central bank believes will gradually rise against a backdrop of strong global growth.
The IHS Markit/CIPS UK Services Purchasing Managers’ Index (PMI), a closely-watched gauge of economic activity, dropped to a three-month low of 53.5 in July from 55.1 in June.
Although staying comfortably above the 50 mark signifying growth, July’s score was weaker than all forecasts in a Reuters poll of more than 30 economists.
Some companies in the survey attributed the July’s score was weaker than all forecasts in a Reuters poll of more than 30 economistswhich kept consumers away from their businesses.
There were also signs that uncertainty around Brexit had held back new business.
Earlier on Friday, BoE Governor Mark Carney warned that Britain faced an “uncomfortably high” risk of leaving the European Union with no deal. His comments drove sterling to an 11-day low against the dollar.
The survey comes a day after the BoE raised interest rates to a new post-financial crisis high of 0.75 percent in part because it took the view that the economy had recovered momentum after a weak start to the year caused by unusually bad weather .
Business groups were critical of the decision, and Friday’s PMI — which BoE officials typically get in advance of their policy decision — will do nothing to assuage their concerns.
“A disappointing survey all round,” said Howard Archer, chief economic adviser to the EY ITEM Club consultancy. “(It) fuels concern over the outlook for the economy and it reinforces belief that it will be some considerable time before the Bank of England raises interest rates again after Thursday’s hike.”
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Mike over at Vox Political has posted a piece about the remarks by Andy Haldane, the Chief Economist at the Bank of England, that Britain’s economy is being damaged by exorbitantly high executive pay. An article in the Independent notes that the average pay of FTSE 100 bosses is now 150 times that of the average UK worker. The Indie then went on to say
This large and growing remuneration gap, Mr Haldane said, “drive[s] a wedge between management and employees…that in turn erodes social capital. A company, like a country, whose physical and social capital is being eroded is one whose wealth-creation capacity is being impaired.”
Social capital refers to trust and relationships in a society and Mr Haldane argued this matters “every bit as much to wealth and well-being” as financial capital such as stocks and shares and other such assets.
Britain’s public finances recorded their first July surplus in three years, as the country’s economic upturn spurred the strongest income tax receipts for the month since records began in 1997.
Finance minister George Osborne welcomed Friday’s official figures, which also showed July was the 12th successive month of falling year-to-date public sector net borrowing, excluding banks.
Public finances have traditionally been in surplus in July, but tepid wage growth in the previous two years depressed the usual surge in payments from individuals filing self-assessed income tax returns.
The Office for National Statistics reported a public finance surplus, excluding banks, of 1.29 billion pounds ($2 billion) in July, almost exactly as forecast in a Reuters poll.
State coffers were boosted by 18.5 billion pounds of income tax receipts — the biggest intake for July on record — and up almost a billion pounds compared with a year ago.
Economists said the figures suggest the government could undershoot its borrowing forecast for the year of 69.5 billion pounds — or 3.7 percent of economic output.
“If this trend persists over the remaining eight months of the fiscal year, this year’s deficit would be 67 billion pounds,” Samuel Tombs, economist at Capital Economics said.
“Even so, with eight months of the fiscal year still to go and often large revisions to early borrowing estimates, it is too soon to conclude that the Chancellor is meeting his fiscal plans with room to spare and could therefore reduce the scale of the austerity measures set to hit the economy.”
British wages have risen far more slowly in recent years than before the financial crisis. A move back towards historical wage hikes is one of the considerations for the Bank of England before it starts to tighten policy.
A separate survey on Friday showed annual pay rises in Britain remained stuck at 2 percent in the three months to July, with little sign they will pick up soon.
Among other ONS figures, public sector net borrowing totalled 24.0 billion pounds in first four months of the 2015/16 tax year, down 23 percent compared with the April-July period of last year.
In the 2014/15 financial year, the deficit stood at 4.9 percent of gross domestic product, half its level in 2010 when Osborne’s Conservative Party first took power, but still bigger than the hole in the finances of most other advanced economies.
Public sector net debt, excluding state-controlled banks, was 1.505 trillion pounds in June, equivalent to 80.8 percent of GDP.
Osborne is aiming to start bringing the ratio down in the 2015/16 financial year after it rose sharply following the financial crisis.