Slowing growth and rising fears for jobs make rate increase less likely

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The Independent Online

The prospect of another rise in interest rates faded yesterday as estimates of economic growth were revised down unexpectedly and a member of the Bank of England's Monetary Policy Committee warned unemployment was set for further rises.

Official figures showed that spending in the NHS and the gambling industry had been significantly weaker than first thought.

The Office for National Statistics cut its estimate for growth in the three months to June to 0.7 per cent from its original number of 0.8 per cent.

It slashed its estimate for growth in the output of the health and social work services from 0.8 to 0.2 per cent after it emerged that hospital admissions had been much lower than expected over the spring. This followed rises of more than 1 per cent in the previous two quarters.

A disappointing out-turn for the gambling industry during the World Cup led it to cut the wider government and other services category by half to 0.4 per cent. "It is the Government that has tipped GDP over from 0.8 to 0.7 per cent," said an ONS statistician.

Meanwhile, downward adjustments to estimates for household spending and investment led the ONS to cut its figure for domestic demand from 0.9 per cent to 0.4 per cent.

The pound fell against the dollar and the euro as traders retreated from bets that the Bank could raise rates as soon as next month.

Geoffrey Dicks, the chief UK economist at Royal Bank of Scotland, said: "These data make an October rate hike extremely unlikely and cast doubt on November."

In a speech yesterday, David Blanchflower, the member of the MPC who voted against the August rate rise, said spending was set to slow as the jobless count rose. "In my view, the labour market has continued to loosen since August," he told business leaders in Wales. "I believe we will see a further rise in unemployment going forward."

He said he has seen no sign of any second-round wage effects from the rise in oil prices. "Should the labour market continue to weaken, we might expect to see a slowdown in households' income growth."

Separate figures yesterday showed mortgage approvals rose 3 per cent last month, a marked slowdown from the 20-plus per cent growth in May and June.

But other analysts said neither the "marginal" slowdown in growth nor Mr Blanchflower's arguments would deter his MPC colleagues from raising rates.

Howard Archer, chief UK economist at Global Insight, said: "With growth holding up well, inflation above-target and rising and the housing market buoyant, the Bank seems very likely to deliver another precautionary rate hike in November."

There was fresh evidence of the resilience of consumer spending from a survey of high street shops by the CBI. Retail sales grew at their fastest rate in nearly two years in September, helped by strong sales of household goods.