The Bank of England is widely expected to lift interest rates on Thursday, moving the borrowing benchmark to 4% after a closely watched survey revealed that the UK services sector accelerated to an eight-month high in October, driven heavily by artificial intelligence spending.
Services Growth and AI Spending Boost the Economy
Business activity across the UK services industry rebounded sharply last month as companies recovered momentum lost after the start of the Iran war. S&P Global’s services purchasing manager’s index (PMI) climbed from 52.1 to 52.8.
That reading sat comfortably above the 50 threshold that marks expansion.
Tim Moore, economics director at S&P Global Market Intelligence, said the survey pointed to an increase in economic resilience despite challenges from geopolitical tensions, elevated cost pressures and subdued consumer confidence.
He noted that greater workloads were attributed to an improved pipeline of sales opportunities, particularly those linked to AI investment spending,
with datacentre construction fueling demand for software and IT applications.
Matt Swannell, chief economic adviser to the Item Club, observed that official figures also showed a surge in IT and professional services.
Swannell said: With at least some of that strength reflecting businesses’ rapid adoption of AI technologies, we expect pockets of strength to sustain momentum into next year.
He added that in a two-speed economy, consumer-facing services will come under increasing pressure as households’ spending power is squeezed.
Bank of England Prepares for Inflation and Rate Decisions
The acceleration in business activity brought a renewed surge in input price inflation. It reached a five-month high in October as roughly four in 10 survey respondents reported rising costs.
Central bank officials remain on alert after the consumer prices index (CPI) moved up from 3.1% in August to 3.5% in September.
Although the nine-member monetary policy committee (MPC) has been split over recent months, a majority is anticipated to back a 0.25 percentage point increase at Thursday’s meeting.
An interest rate hike looks nailed on at tomorrow’s MPC meeting. And today’s data only adds to the weight of evidence.
Matt Swannell, the chief economic adviser to the economic forecasters the Item Club
Tim Moore pointed out that manufacturing surveys earlier in the week also revealed intense price pressures.
Moore said: These signals underscore the near-certainty of a Bank of England rate hike in November and collectively raise the likelihood of further Bank of England policy tightening into 2027.
Employment Gains Follow Service Sector Expansion
The expansion in workloads spurred service providers to hire additional staff in October, bringing a formal close to two years of continuous job cutting across the sector.
Firms absorbed some of their rising costs, with the services output price balance dropping from 57.8 in September to 56.9.
Economists argue the adjustment falls short of what is needed to halt a rate rise.
Rob Wood, chief UK economist at Pantheon Macroeconomics, noted: We estimate this is consistent with underlying services inflation rising about 4.1%, down from the latest official reading of 4.4% but still too high for the MPC to stand pat.
How many members of the monetary policy committee will ultimately vote for the 0.25 percentage point increase on Thursday remains unstated.