In a surprise unanimous decision by the Bank of England’s Monetary Policy Committee on Thursday, the UK’s central bank hiked its key refinancing interest rate by half a per cent to 1.75 per cent, its biggest increase for 27 years. Thursday’s hike was the sixth rise in a row and was in line with economists’ expectations.

The bank said it was being forced to take aggressive action due to a new forecast that sees inflation rise to over 13 per cent by the fourth quarter of this year, largely due to another big increase in regulated household energy prices. It had previously forecast a peak in inflation of only 9.4 per cent. The bank also confirmed its expectations that the economy will start contracting later this year.

In the meantime, eurozone business activity unexpectedly contracted in July due to a slowdown in manufacturing, and services sector growth coming to a near halt, as accelerating cost increases forced consumers to tighten their belts, a survey showed.

S&P Global’s final composite Purchasing Managers’ Index (PMI), used as a measure of economic health, fell to a 17-month low of 49.9 in July from June’s 52.0, albeit slightly better than a preliminary 49.4 estimate. Readings below 50 indicate contraction.

S&P Global said production was weakening in all countries surveyed, other than in the Netherlands, and that the rate of decline was of particular worry in the currency bloc’s three biggest economies, namely, Germany, France and Italy.

Finally, in the US, the services industry unexpectedly recovered in July following firm growth in new orders, supporting views that the economy was not in recession despite a fall in output in the first half of the year.

According to the Institute for Supply Management (ISM), July services PMI rose to 56.7 from 55.3 in June, a strong expansion rate that suggests the economy is not in dire straits. Analysts had expected the headline index to decline to 53.5.

Comments from ISM member respondents included in the report underlined various issues being seen in the services sector, including slowing economic activity and inflation, among others.

This report was compiled by Bank of Valletta for general information purposes only.