Economy growth makes rate hike 'a done deal'

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The Independent Online

Interest rates were given another nudge towards 5 per cent today after it emerged the UK economy expanded by 0.7 per cent for a fourth quarter in a row.

The provisional GDP estimate was 0.1 per cent higher than most forecasts, leading analysts to describe a hike in borrowing costs as a "done deal" when Bank of England policymakers meet on November 8 and 9.

Growth of 0.7 per cent for the three months to September 30 came after the service sector slowed by less than feared and production output extended its recent improvement - rising 0.3 per cent against zero growth in the second quarter.

The UK economy also grew by 0.7 per cent in the previous three quarters.

Philip Shaw, chief economist at Investec Securities, said he expected the UK economy to grow by 2.6 per cent over this year and also next year.

He said: "This would suggest that GDP growth will exceed Chancellor Gordon Brown's range of 2 per cent-2.5 per cent for this year, but fall a little short of his range for next year of 2.75 per cent to 3.25 per cent."

While Mr Shaw said an increase in interest rates was "firmly on the cards", he believed there were reasons to be cautious further ahead.

He said: "Growth is arguably around trend rather than above it and retail sales figures for September pointed to some slowdown in consumer demand.

"Unless there are clear indications of higher inflation pressures over the next few months, we stand by our view that base rates will not rise above 5 per cent."

Today's GDP figures estimated quarterly growth of the service sector at 0.8 per cent in the third quarter, following a rise of 0.9 per cent in the second quarter. The largest contribution to the slowdown came from the distribution, hotels and restaurants sector, the statistics showed.

The performance of the services sector accounts for around 74 per cent of the UK economy.

Within the production sector, manufacturing is estimated to have risen by 0.7 per cent in the third quarter, the same as the rise in the previous three months.