Slow growth adds to Bank's dilemma over rates

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The Bank of England faces a tough decision on interest rates next month after figures showing a lacklustre start to the year for the economy were left unchanged yesterday.

The Bank of England faces a tough decision on interest rates next month after figures showing a lacklustre start to the year for the economy were left unchanged yesterday.

The economy grew by 0.6 per cent in the first quarter of the year - its slowest growth rate for a year, the Office for National Statistics said.

The Bank of England had hinted that it expected the ONS to revise up its first estimate, saying it was "not consistent" with a welter of evidence pointing to stronger growth.

"Doubts over the strength of the UK economy leave the [Bank] in an awkward position," said David Page, UK economist at Investec bank. "Unlike the ONS, the Bank of England cannot revise its interest decisions in the light of fresh evidence further down the line."

The ONS defended the figures, saying it removed the warning of possible revisions it issued with last month's estimate.

There is growing speculation that the Bank's monetary policy committee will abandon its previous strategy of raising rates every three months and bring forward the next rise to either June or July. House prices, retail sales and consumer borrowing are running at record levels, and surveys from business groups point to a strong rebound in corporate activity.

However, the ONS said industrial output had fallen even further than it thought in its first estimate in April. Production output contracted by 0.6 per cent rather than 0.5 per cent. Growth in construction was also slightly lower.

The sharper fall offset the benefit of an upward revision to growth in Britain's dominant services sector, seen as growing by 0.9 per cent rather than an initial estimate of 0.8 per cent.

Yesterday's report also showed the UK had returned to the unbalanced pattern of growth that bedevilled it during the boom of the late 1990s.

Consumer spending grew at a punchy 0.9 per cent for the third quarter in a row, while workers' earnings grew by 2.2 per cent - the strongest growth for almost four years. The growing trade deficit knocked 0.4 per cent off the quarterly growth rate and corporate profits fell for the first time since the global recession kicked in the summer of 2001.

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