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UK composite PMI surges unexpectedly in February
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Sterling and gilt yields rise on back of PMI
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Price pressures show further easing
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Manufacturing contracts again, but pace of decline cools
(Adds Bank of England lines, fresh economist comment)
By Andy Bruce
LONDON, Feb 21 (Reuters) - Britain looks on course to
sidestep a long recession after a survey showed a surprise
return to growth by businesses this month, raising the
likelihood of another Bank of England interest rate hike in
March.
The preliminary "flash" reading of the S&P Global/CIPS UK
Composite Purchasing Managers' Index (PMI) jumped to 53.0 in
February from 48.5 in January, above the 50 threshold for growth
for the first time since July.
It surpassed all forecasts in a Reuters poll of more than 20
economists, which had pointed to a reading of 49.0.
Sterling jumped against the dollar and notched its biggest
gains against the euro in a month, while British government bond
prices fell on the back of the PMI which was stronger than
readings for both France and Germany.
The strength of the survey made it more likely that the BoE
- grappling with an inflation rate still above 10% - would raise
interest rates to 4.25% in March, despite further signs of
easing price pressures in the PMI, economists said.
"The report poses a clear challenge to the BoE's central
view that a long recession and rise in unemployment will bring
inflation down such that further rate increases are not
required," said J.P. Morgan economist Allan Monks.
Financial markets pointed to an 95% chance of an increase in
Bank Rate next month, up from 90% early on Tuesday.
There were also signs of unexpected economic strength in
public finance data that showed income and corporate tax
revenues rising in January.
Finance minister Jeremy Hunt is facing calls from within his
Conservative Party to cut taxes in his March 15 budget and from
trade unions to raise pay for public service workers.
But he stuck to his message about the need to tackle a debt mountain of almost 2.5 trillion pounds, or almost 99% of economic output. The dominant services sector drove the improved reading in the PMI survey, which financial data company S&P Global put down to recovering global demand and stability since the market turmoil associated with the brief premiership of Liz Truss. Crucially for the BoE, the PMI's price indexes - a good guide of future inflation pressure - continued to fall, with businesses' costs rising at the slowest pace since April 2021. While the PMI for the services sector rose to 53.3 in February from January's 48.7, its highest since June last year, factory activity continued to contract albeit less severely, with the manufacturing PMI increasing to 49.2 from 47.0, close to 50, the no-change mark. A Confederation of British Industry survey published on Tuesday showed falling output and orders, and like the PMI, receding cost pressures too. Growing numbers of companies in services and manufacturing were more optimistic about their prospects. A Barclays survey of small and medium-sized firms showed 41% were confident about the outlook - a nine-month high. (Reporting by Andy Bruce; Editing by Susan Fenton, Catherine Evans and Christina Fincher)
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