Bank of England primed to hike rates as AI fires up UK services

The Bank of England looks set to lift borrowing costs on Thursday, with a majority of its nine-member monetary policy committee expected to back a quarter-point increase that would take the base rate to 4%. The trigger: a fresh reading showing Britain's services sector revved up last month to an eight-month high, helped along by a wave of spending on artificial intelligence.

S&P Global's services purchasing managers' index climbed to 52.8, up from 52.1 a month earlier and comfortably above the 50 mark that separates growth from contraction. Tim Moore, economics director at S&P Global Market Intelligence, said providers logged their fastest upturn in activity since February alongside a solid rebound in new orders, with much of the extra work tied to AI investment spending and the datacentre building boom.

There's a staffing twist too. After two straight years of shedding jobs, services firms hired again in October as workloads piled up — a stretch of cuts many had blamed on higher labour and business costs. Moore called it evidence of rising economic resilience despite geopolitical tensions, elevated cost pressures and cautious consumers.

Price pressures are the sticky part. Input cost inflation hit a five-month high, and about four in ten survey respondents reported paying more, versus just 1% seeing prices fall. Officially, CPI inflation climbed to 3.5% in September, up from 3.1% in August, and the Bank has made clear it is watching closely.

Economists lined up behind the hike. Matt Swannell, chief economic adviser to the Item Club, said the move looks nailed on, though he flagged a two-speed economy — business-to-business services riding AI adoption while consumer-facing firms buckle under squeezed household budgets. Rob Wood of Pantheon Macroeconomics noted services output price growth cooled to 56.9 from 57.8, which he reckons points to underlying services inflation around 4.1% — lower than the official 4.4%, but still too hot for the MPC to sit still.

Markets are pricing three more increases ahead, while most City economists think inflation peaks next spring, capping the extra hikes at one or two. Across the Channel, eurozone inflation jumped to a three-year high of 4%, up from 3.8% in September on surging energy and food costs, making a December rate rise from the European Central Bank more likely after it held borrowing costs steady last week.