Growth slows but rate fears persist: Chancellor welcomes output figures Intervention hint calms dollar

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THE PACE of growth of the British economy slowed in the third quarter, but not enough to guarantee there would be no more base rate rises this year.

Kenneth Clarke, Chancellor of the Exchequer, welcoming yesterday's output figures, said they showed growth was 'healthy and sustainable'. Some analysts, however, said the economy was still expanding fast enough for inflationary pressure to build.

Gross domestic product rose 0.7 per cent in July to September, lower than the previous quarter's 1.1 per cent advance. The year-on- year rate of growth slipped to 3.6 per cent from 3.8 per cent in the second quarter.

Service sector output rose by a similar amount as in the second quarter.

Industrial output growth slowed down, partly due to temporary cuts in oil production during the summer.

Economists were divided about what conclusions on inflationary pressure the Chancellor and Bank of England would draw from the preliminary growth estimates - which are expected to be revised upwards.

Leo Doyle, an economist at Kleinwort Benson, said: 'It was a reasonably robust growth figure, probably enough to justify another interest rate rise this year.'

But David Miles, UK economist at Merrill Lynch, thought an increase before the New Year was unlikely. 'The economy will reach full capacity towards the end of next year, but the Governor and Chancellor will probably hold off until after Christmas unless something terrible happens,' he said.

Analysts said the GDP figures did not provide concrete evidence that economic growth had slowed to a sustainable pace. Markets were likely to remain nervous because of the chance of an increase in interest rates.

Separate figures on trade with countries outside the European Union showed Britain's deficit edged up to pounds 349m in September, but the third-quarter total of pounds 1bn was the lowest since the beginning of 1988. Erratic items such as ships and gemstones explained the widening of the gap last month. Excluding these, the deficit narrowed by pounds 20m to pounds 314m.

The volume of exports excluding oil and erratic items rose a fraction last month. Import volumes fell slightly for the second month running.

Mr Clarke was forced to postpone yesterday's annual pre- Budget meeting at Dorneywood of ministers and senior officials from the Treasury and Bank of England, because of the emergency meeting of EU finance ministers in Brussels.

(Graph omitted)