UK rate hike seen as services growth accelerates to eight-month high

Growth in the UK services sector accelerated to an eight-month high in October, supported by stronger demand and an increase in employment, although rising cost pressures added to expectations of further Bank of England interest rate hikes, survey data from S&P Global showed on Wednesday.

The seasonally adjusted services purchasing managers' index rose to 52.8 points in October from 52.1 in September, marking the fourth consecutive month of expansion and the highest reading since February.

However, the final reading was below the flash estimate of 53.1 points and remained below the long-run average of 54.2 points. A reading above 50 points indicates expansion, while one below signals contraction.

S&P Global said the improvement came from a sustained recovery in new orders, which increased for the fourth consecutive month and at the fastest pace since January.

Domestic demand largely supported growth, with some UK businesses reporting higher sales linked to artificial intelligence investment spending, easing risk aversion among clients, and more supportive economic conditions.

Export sales declined slightly, although the reduction was the smallest since the current downturn began in March. Squeezed consumer budgets and elevated geopolitical uncertainty continued to weigh on demand, S&P Global said.

Improving order books also encouraged service providers to increase staffing levels for the first time in just over two years, ending a prolonged period of job cuts.

The pace of hiring remained marginal, however, as some UK businesses maintained recruitment freezes amid elevated costs, while others cited AI adoption as a reason for not replacing employees who had left voluntarily.

Meanwhile, input price inflation accelerated for the third consecutive month to its highest level since May, reflecting higher energy, fuel and transportation costs, alongside wage pressures and more expensive raw materials.

Tim Moore, economics director at S&P Global Market Intelligence, said: "October data highlighted a combination of faster output growth and stronger price pressures across the UK service economy, mirroring the trends in the manufacturing sector."

He added that the figures underscored the "near-certainty" of a Bank of England interest rate hike in November and increased the likelihood of further monetary policy tightening into 2027.

Across the wider UK private sector, the composite output index rose to 52.9 points in October from 52.0 in September, also reaching its highest level since February.

The final composite reading was slightly below the flash estimate of 53.1.

The improvement reflected stronger growth across both manufacturing and services, with manufacturing production expanding at its fastest pace since September 2024.

New business across the private sector increased at the strongest rate for nine months, supported by a renewed expansion in export sales.

Private sector employment also increased for the first time in 25 months, driven by hiring in services, while input cost inflation accelerated to its highest level since June.

On Monday, S&P Global said the seasonally adjusted manufacturing PMI rose to a five-month high of 52.8 points in October from 51.9 in September, in line with the flash estimate.

The services PMI is compiled by S&P Global from responses to questionnaires sent to a panel of around 650 service sector companies in the UK. Data were collected between October 12 and 28.

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