Bank holds rates steady as the recovery slows sharply

The British economy barely grew in December, according to the latest estimates from the country's oldest economics research body.

The National Institute for Economic and Social Research, which has a highly accurate record, says that GDP growth in December was negligible, leaving the rate over the three months to the end of the year at 0.5 per cent, down from 0.6 per cent in the three months to November. It is in line with the Office for Budget Responsibility's forecast, as used by the Treasury, and an early sign that the assumptions underlying the Government's plan to fix the public finances may be realistic.

The news came as the Bank of England kept interest rates on hold at the latest meeting of the Monetary Policy Committee, as universally expected.

The cold weather, says the NIESR, will have had only a "modest" effect, suggesting an underlying, but not catastrophic, slowdown as the initial boosts to growth from stock rebuilding fade.

Meanwhile, another group, the Centre for Economics and Business research (CEBR), has doubled the probability it places on a "double dip" from 10 to 20 per cent, and trimmed its growth forecast for 2011 to 1.1 per cent, against an official figure of 2.1 per cent, and consensus of 1.9 per cent.

One area of the economy that is strong is manufacturing. The Office for National Statistics said that the sector extended its recent record of output gains in November, albeit after the sharpest slump since the 1930s. Industry is set to record a 6 per cent annualised rate of growth during the last months of 2010, with survey evidence equally bullish for 2011. However, at around 13 per cent of GDP, manufacturing can only make a relatively small contribution to recovery.

The MPC faces a difficult dilemma. While the recovery lacks momentum, inflationary pressures have intensified from global commodity prices, and the Bank faces criticism for allowing its control of inflation to become "a joke". The Bank rate has stood at 0.5 per cent since March 2009, and the quantitative easing programme has been on hold for just over a year.

Opinion within the MPC on whether to start the next phase of the interest rate cycle sooner or later remains intense, despite the appearance of a calmly unchanged policy stance. The minutes of the MPC meeting will be published in 10 days; a definitive view will arrive with the next Inflation Report, on 16 February.

Most City economists expect the Bank rate to rise to 0.75 per cent at the August or November MPC meetings, with a few predicting May. Such an increase would add £40 a month to the average British mortgage bill, an unwelcome additional squeeze on households.

David Kern, the chief economist at the British Chambers of Commerce, said: "The recovery is fragile and risks of a setback are serious. Pressures on businesses and individuals will intensify over the next few months, but we urge the MPC not to overreact to temporary increases in inflation. As long as wage increases remain modest, and disposable incomes continue to be squeezed, it remains likely that the surge in inflation will be reversed, and sharp falls can be expected in the final months of 2011 and in 2012".

GDP data for the fourth quarter of 2010 will be released by the ONS on 25 January.

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Sales Executive / Foreign Exchange Dealer - OTE £40,000+

£16000 - £40000 per annum: Recruitment Genius: A Foreign Exchange Dealer is re...

SThree: Experienced Recruitment Consultant

£20000 - £40000 per annum + OTE + Incentives + Benefits: SThree: Established f...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE 40/45k + INCENTIVES + BENEFITS: SThree: The su...

Recruitment Genius: Collections Agent

£14000 - £16000 per annum: Recruitment Genius: This company was established in...

Day In a Page

Refugee crisis: David Cameron lowered the flag for the dead king of Saudi Arabia - will he do the same honour for little Aylan Kurdi?

Cameron lowered the flag for the dead king of Saudi Arabia...

But will he do the same honour for little Aylan Kurdi, asks Robert Fisk
Our leaders lack courage in this refugee crisis. We are shamed by our European neighbours

Our leaders lack courage in this refugee crisis. We are shamed by our European neighbours

Humanity must be at the heart of politics, says Jeremy Corbyn
Joe Biden's 'tease tour': Could the US Vice-President be testing the water for a presidential run?

Joe Biden's 'tease tour'

Could the US Vice-President be testing the water for a presidential run?
Britain's 24-hour culture: With the 'leisured society' a distant dream we're working longer and less regular hours than ever

Britain's 24-hour culture

With the 'leisured society' a distant dream we're working longer and less regular hours than ever
Diplomacy board game: Treachery is the way to win - which makes it just like the real thing

The addictive nature of Diplomacy

Bullying, betrayal, aggression – it may be just a board game, but the family that plays Diplomacy may never look at each other in the same way again
Lady Chatterley's Lover: Racy underwear for fans of DH Lawrence's equally racy tome

Fashion: Ooh, Lady Chatterley!

Take inspiration from DH Lawrence's racy tome with equally racy underwear
8 best children's clocks

Tick-tock: 8 best children's clocks

Whether you’re teaching them to tell the time or putting the finishing touches to a nursery, there’s a ticker for that
Charlie Austin: Queens Park Rangers striker says ‘If the move is not right, I’m not going’

Charlie Austin: ‘If the move is not right, I’m not going’

After hitting 18 goals in the Premier League last season, the QPR striker was the great non-deal of transfer deadline day. But he says he'd preferred another shot at promotion
Isis profits from destruction of antiquities by selling relics to dealers - and then blowing up the buildings they come from to conceal the evidence of looting

How Isis profits from destruction of antiquities

Robert Fisk on the terrorist group's manipulation of the market to increase the price of artefacts
Labour leadership: Andy Burnham urges Jeremy Corbyn voters to think again in last-minute plea

'If we lose touch we’ll end up with two decades of the Tories'

In an exclusive interview, Andy Burnham urges Jeremy Corbyn voters to think again in last-minute plea
Tunisia fears its Arab Spring could be reversed as the new regime becomes as intolerant of dissent as its predecessor

The Arab Spring reversed

Tunisian protesters fear that a new law will whitewash corrupt businessmen and officials, but they are finding that the new regime is becoming as intolerant of dissent as its predecessor
King Arthur: Legendary figure was real and lived most of his life in Strathclyde, academic claims

Academic claims King Arthur was real - and reveals where he lived

Dr Andrew Breeze says the legendary figure did exist – but was a general, not a king
Who is Oliver Bonas and how has he captured middle-class hearts?

Who is Oliver Bonas?

It's the first high-street store to pay its staff the living wage, and it saw out the recession in style
Earth has 'lost more than half its trees' since humans first started cutting them down

Axe-wielding Man fells half the world’s trees – leaving us just 422 each

However, the number of trees may be eight times higher than previously thought
60 years of Scalextric: Model cars are now stuffed with as much tech as real ones

60 years of Scalextric

Model cars are now stuffed with as much tech as real ones