Interest Rate would remain on hold

Growth in the UK service sector slowed further in September to its lowest rate in nearly two and a half years, a survey has indicated. The latest Markit service sector purchasing managers index (PMI) fell to 53.3 last month from 55.6 in August. Markit said that its survey data indicated that UK GDP growth slowed to 0.5% in the third quarter of the year, and is entering the fourth quarter at a pace of 0.3%. This compares with growth of 0.7% in the second quarter of the year. Chris Williamson, chief economist at Markit, said: "Weakness is spreading from the struggling manufacturing sector, hitting transport and other industrial-related services in particular. Strong U.K. industrial production data released showed that industrial production in the U.K. rose better than expected in August, boosting the outlook for third quarter growth. Industrial production rose 1.0% from a month earlier, beating expectations for a 0.3% increase. Industrial output rose 1.9% from a year earlier, compared to expectations for a 1.2% increase. Manufacturing production was up 0.5% from a month earlier, however it was down 0.8% on a year-over-year basis.   The Bank of England’s Monetary Policy Committee announced that the Base Rate would remain on hold at 0.5% by split majority vote. The committee voted 8-1-0, with Ian Mcafferty the single member continuing to vote for a rate hike, the remainders voting for no change and no one voting for a rate cut. The committee cited that the U.K. economy is withstanding global pressures, whilst signalling that they have room to keep the Base Rate at a record low as inflation weakness persists. They continued to cite that the near-term outlook for inflation had weakened since August and that price growth would probably stay below 1% until spring 2016. The BoE’s analysis showed that unit-labour costs are not yet strong enough to push inflation back to its 2% target. While the Office of National Statistics have put the annual increase in unit labour costs at 2.2% in Q2, the central bank has said the underlying figure may be much weaker. Investors are now pricing in a rate increase in late 2016. Europe's economic recovery is showing dangerous signs of falling flat after another disappointing set of data from the single currency. September's combined Purchasing Manager's Index (PMI) of the services and manufacturing sector fell to 53.6, from 54.3 in August. This suggests momentum has petered out after a spike in activity over the summer. The weak numbers all but guarantee the European Central Bank will be pushed into further stimulus measures, ramping up its €1 trillion quantitative easing programme. Economists suggest an announcement on more QE could be due at the end of the year. September's numbers suggest growth remained stuck at 0.4pc in the third quarter of the year, unchanged from the same period last year when the ECB had not yet launched QE. We saw the Euro weaken off after data showing that German industrial production fell at the fastest rate in a year in August. This added to concerns that a slowdown in global growth is spreading to the euro area’s largest economy. German industrial output fell 1.2% from a month earlier, missing forecasts for a 0.2% increase. The fall in imports by -3.1% in August compared to a month earlier was viewed as a sign of slowing domestic demand. To compound matters, exports were seen to slow by a comparatively larger -5.2%, indicating slowing global demand for German goods and services. Accordingly, the Euro weakened in early morning trading against the US Dollar and the Pound Sterling, as we led into the Bank of England’s interest rate announcement at midday.  The ISM non-manufacturing activity index in September fell to 56.9 compared to the estimated drop to 57.5 from August's 59. The pace of growth in service industries cooled from the best reading in a decade, a sign that weak wages may be pushing demand down amid signs of a slowdown in the global economy. Services PMI figures released from the US showed that the sector is still robust. The index came in at 55.1 for September; economists had expected a reading of 55.6. The report showed that hiring remained strong, although it is lower year on year. Business activity and incoming new work also rose at slower rates. U.S. exports figures took a hit from an ailing global economy in August and imports from China surged, fuelling the largest expansion of America's trade deficit in five months. The data released by the Commerce Department highlights the U.S. economy's vulnerabilities to a strong dollar and weak demand in foreign markets, which could impose further caution on the Federal Reserve's plans to hike interest rates.  The FOMC released minutes from their September 16-17 meeting, where they kept rates on hold and Janet Yellen revised inflation forecasts and the interest rate path downward due to low oil prices, the slowdown in China and the appreciating US Dollar. As expected the minutes revealed that Federal Reserve officials put off an interest-rate increase in September because of growing risks to their outlook for economic growth and inflation, mainly from China, even as they continued to say they were on track to raise the target later this year. The minutes showed that although the FOMC had noted that domestic economic conditions, including data on consumer spending and housing, had continued to improve, and the labour market had reached, or was close to, the committee’s long-run estimates for unemployment, the committee decided that it was prudent to wait for additional information to confirm that the economic outlook had not deteriorated, before committing to hike US rates. A slowdown in emerging markets driven by weak commodity prices has led to The International Monetary Fund downgrading its forecast for global economic growth this year. It has reduced its figure to 3.1% from the 3.3% it predicted in July. The 2016 forecast is down to 3.6% from 3.8%. The sharpest downgrades are for emerging economies, especially Brazil, Nigeria, South Africa and Russia. So the IMF is still predicting growth, but it is distinctly lacklustre growth, especially for the current year.