City bets on quarter point rate cut

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The Independent Online
MOST CITY EXPERTS believe that UK interest rates will fall by only one quarter per cent next month, rather than the hoped for half per cent cut, after new official figures revealed stronger-than-expected economic growth. According to data from the Office for National Statistics (ONS), a buoyant services sector helped the economy grow by 0.5 per cent last quarter - the same rate as the second quarter, and stronger than the City expected. The annual growth rate in Gross Domestic Product (GDP) came in at 2.5 per cent, 0.2 per cent higher than most forecasts.

John O'Sullivan at Greenwich NatWest commented: "The resilience of the services sector in terms of activity and jobs growth will weigh on the MPC [the Bank of England's interest-rate setting committee] in November and mitigates against a dramatic (that is, 0.5 per cent) loosening of policy."

Adam Cole at HSBC Securities added: "A 0.25 point rate cut at the November 4th and 5th MPC meeting still looks highly likely".

Sterling briefly gained against the German mark following the release of the data as hopes of substantial rate reductions faded. But the pound finished the day at 2.767, down 1.5 pfennigs from yesterday's close. The data also hurt sentiment on the equity markets, and the FTSE 100 closed down 12.8 points at 5,217.1 after a lacklustre day's trading.

The services sector grew by 0.6 per cent in the third quarter of the year, unchanged from the second quarter, and there was a small - as yet, unquantified - increase in manufacturing output, the ONS said.

The Bank of England published a separate in-depth study of the relationship between open trade regimes and productivity. It concludes: "Between 1970 and 1992, some 15 per cent of the initial gap in productivity between United Kingdom and the United States was closed. Of this, roughly half was attributable to the rise in international openness."