By William Schomberg
LONDON (Reuters) -Britain's economy kept up its early 2024 momentum with a survey showing strong growth for services firms and business optimism at a two-year high, but inflation pressures are likely to keep the Bank of England wary about cutting borrowing costs.
Adding to signs that Britain's shallow recession of last year is likely to be short-lived, the preliminary February S&P Global/CIPS UK Composite Purchasing Managers' Index (PMI), which spans services and manufacturing firms, rose to 53.3, the highest in nine months, from January's 52.9.
Economists polled by Reuters had forecast no change from January's reading.
But there were potential areas for concern for the BoE in the survey including strong growth in wages among services firms and Red Sea tensions hitting factory supplies, pushing a measure of price increases by businesses to its highest since July.
Among services firms, the PMI's headline measure held at 54.3. Manufacturing remained below the no-growth threshold of 50.0 but edged up to 47.1 from 47.0 in January.
Chris Williamson, S&P Global Market Intelligence's Chief Business Economist, said the survey pointed to the economy growing by 0.2% or 0.3% in the first three months of 2024 after contracting in the third and fourth quarters of last year.
That is likely to be a relief for Prime Minister Rishi Sunak who has had to endure taunts of "Rishi's recession" from the opposition Labour Party which is riding high in opinion polls ahead of a national election expected later this year. Williamson said the pick-up was being led by demand for financial services amid expectations of imminent rate cuts while manufacturing activity continued to contract and consumer-facing services firms were still battling cost-of-living pressures.
"With growth accelerating and prices on the rise again, February's data mean policymakers are increasingly likely to err on the side of caution when considering the appropriateness of cutting interest rates," he said.
Williamson said there was a risk inflation gets stuck at its most recent level of 4% rather than fall to the BoE's 2% target soon, as widely expected.
The central bank this month signalled that the time might be approaching for cuts to its benchmark lending rate which is at its highest since 2008. But most policymakers are still looking for evidence that inflation pressures will not persist.
Alex Kerr, an economist with Capital Economics, said a faster rise in prices charged by services firms suggested services inflation - which is being closely watched by the BoE - would ease only gradually to about 5.0% in six months' time.
"This will add to the Bank of England's unease about lingering domestic price pressures," Kerr said but added he still thought the BoE would start cutting rates this summer.
Investors are pricing a 50% chance of a first quarter-point rate cut in June and fully pricing in a cut by August, little changed from before the PMI was published.
The survey showed average cost burdens increased in February at the fastest pace for six months, pushed up by higher labour costs as well as rising freight costs for manufacturers which were linked to the Red Sea crisis.
Overall, new business increased at the fastest pace since May last year but companies were cautious about hiring due to the strong increases in pay.