Slump in UK services mood points to BoE making back-to-back rate cuts

The worst level of business confidence in the UK's dominant services in a year and a half has raised the prospect of the Bank of England cutting at successive meetings.

April saw the services sector slip into a negative reading for the first time in a year and a half, according to S&P Global's purchasing managers' index (PMI) survey, as Donald Trump's tariffs hit overseas business orders.

The UK services PMI fell to 49.0 for April, down from 52.5 in March, with a reading below 50 indicating a fall in activity.

"UK service sector output slipped into contraction for the first time in one-and-a-half years as heightened business uncertainty weighed on order books during April," said Tim Moore, economics director at S&P Global Market Intelligence.

"Export conditions were particularly weak, with new business from abroad falling to the greatest extent since February 2021."

On the back of the survey, the Bank of England's monetary policy committee might make back-to-back interest rate cuts, said economist Rob Wood at Pantheon Macroeconomics.

"President Trump’s month of tariff hokey cokey massively stoked uncertainty that has hit UK business sentiment hard," Wood said.

The UK composite PMI, which combines the services reading with last week's data showing the worst manufacturing slump since the pandemic, for April is so far consistent with second-quarter GDP growth between -0.4% to 0.0% quarter-to-quarter, he added.

However, economists said the PMI data should be interpreted with caution.

Matt Swannell, chief economic advisor to the EY ITEM Club, said the survey typically does a better job at capturing fluctuations in business confidence than actual changes in private sector activity, but GDP growth is likely to be slower in the second quarter as the initial effects of tariffs start to be felt, he said.

Despite the significant rise in output price inflation resulting from higher labour costs, a 25bps rate cut at this Thursday’s MPC meeting "remains almost certain".

"Early signs suggest the MPC may be open to adopting a more proactive approach to loosening at subsequent meetings, but the minutes and press conference will provide a better sense of whether that's a realistic possibility."

Wood said the MPC "can get away with a couple of precautionary rate cuts back-to-back in May and June given the darker growth outlook, but we think rate setters will continue to signal a gradual and cautious approach to easing after that".