GDP surge casts doubt on rate cut

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The Independent Online

Britain's annual rate of economic growth hit a three-year high during the third quarter, beating expectations, and dampening hopes of an imminent interest rate cut.

GDP grew by 0.8 per cent in the three months to the end of September, the same rate at which it grew in the second quarter. On an annual basis, growth is now at 3.3 per cent, the Office of National Statistics said yesterday, the highest rate since the second quarter of 2004.

The ONS said the strong growth in the economy was driven by the business services and finance sector, which expanded by 1.7 per cent over the quarter. Transport, storage and communication grew by 1.1 per cent, as did distribution, hotels and restaurants. Growth in production slowed, however, falling to just 0.2 per cent for the period, compared to 0.7 per cent in the previous three months.

Economists had expected a much poorer performance over the third quarter, anticipating that the credit crisis and the Northern Rock affair would have had a knock-on effect on the wider economy. The strong figures mean the Bank of England is less likely to consider a cut in interest rates before the end of the year.

"Ongoing above-trend growth in the third quarter is likely to reinforce the Bank of England's concerns about capacity constraints," said Howard Archer, the chief UK and European economist at Global Insight.

"Along with recent data showing buoyant retail sales in September and a still healthy labour market, this dilutes the case for an interest rate cut as soon as November," he said. "As yet, there is no compelling sign that economic activity is slowing markedly, and the Bank of England believes that some slowdown is necessary to ease underlying inflationary pressures."

Mr Archer added that growth would be likely to slow in the final quarter, as consumers struggle in the face of five interest rate rises in 15 months, paving the way for rate cuts next year.