FTSE 100 reaches record high as UK services sector rebounds

Shares in Britain’s top 100 companies reached an all-time high on Friday, after buoyant sales across the services sector last month showed the economy remained resilient following the post-Brexit vote slump.

A flurry of orders that appeared to bolster the Bank of England move to raise interest rates this week, helped send the FTSE 100 index to 7,560, beating the previous end of day high of 7,556 on 12 October.

The B&Q owner Kingfisher and the drugs groups Informa and NMC Health were among the biggest gainers along with the bottling plant arm of Coca-Cola.

Services firms “signalled a shift in momentum”, according to a survey of the sector as activity expanded at the fastest rate since May, helped by a rise in sales and a string of successful product launches.

Analysts said the survey showed the services sector, which makes up almost 80% of UK economic activity, remained resilient despite Brexit uncertainty.

The pound, which had come under pressure following a gloomy outlook for the economy from the Bank of England on Thursday, regained ground lost during the previous day against the dollar and the euro. Sterling hit $1.31 after falling to $1.30 on Thursday.

Ben Broadbent, the deputy governor of the central bank, said on the BBC’s Today programme that the BoE’s monetary policy committee report – indicating that it may need to raise interest rates two more times to bring down inflation – was not a promise.

While justifying an increase in the Bank’s base rate by 0.25% to 0.5%, which a majority of the Bank’s interest rate setters agreed despite a series of lacklustre economic surveys, he conceded that the outlook remained weak and Brexit uncertainty was weighing on the UK’s economic performance.

“It is clearly having some effects on the economy. We think investment is weaker than it would otherwise have been,” he said.

“Obviously consumption has been affected significantly by the squeeze on real incomes that results from last year’s referendum,” he said.

The low value of the pound has pushed up the cost of imports and sent inflation up to 3% in September, while wages growth was stuck at 2.2%.

At 55.6 in October, up from 53.6 in September, the headline purchasing managers index (PMI) for the services sector was slightly stronger than the post-crisis trend and signalled the fastest pace of business activity growth for six months, said IHS Markit. A reading above 50 indicates an expansion in activity.

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Lenders have already bumped up the cost of fixed rate mortgages ahead of the Bank of England’s decision to raise base rate from 0.25% to 0.5%, and mortgage borrowers on tracker and variable rates will see their monthly payments become more expensive in the coming days. ​

Savers will gain as banks and building societies improve the rates available on deposit and Isa accounts, although increases are unlikely to come for several weeks.

How much consumers and businesses cut back on spending and investment in the face of higher rates will depend on signals from the Bank about the trend for future increases.

However, job creation in the services sector added to the picture of a weak outlook after firms reported the weakest rise in seven months.

Chris Williamson, chief business economist at IHS Markit, which compiles the survey, said: “While an upturn in business activity growth adds some justification to the Bank of England’s decision to hike interest rates for the first time in a decade, a deeper dive into the numbers highlights the fragility of the economy and points to downside risks for the outlook.

“A downturn in business optimism about the year ahead, fuelled mainly by Brexit-related uncertainty, suggests that risks are tilted to the downside as far as future growth is concerned. Not surprisingly, employment growth slowed for a second successive month as the business mood grew more cautious and risk averse.”

Howard Archer, chief economic adviser to the EY Item Club, said: “Serious uncertainties over the outlook evident among services companies fuels suspicion that it is likely to be some considerable time before the Bank of England hikes interest rates again.”