UK GDP: Slower growth puts Bank of England rate hike on back burner

Sterling fell as much as 0.3 cents following the release of the data as the Bank of England had forecast 0.9% growth over the quarter

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The pound sank today as slowing growth in the fourth quarter gave the Bank of England added breathing space to support the UK's recovery with record low interest rates.

Official estimates showed a buoyant services sector driving growth of 0.7 per cent between October and December, making 2013 the best year for the economy since 2007.

But expansion was slower than the previous two quarters, and also well below the pace signalled by recent industry surveys.

With UK output still 1.3 per cent below its pre-recession peak, the figures appeared to support the Bank’s argument that there is enough slack in the economy to support continued stimulus.

Speculation over an earlier-than-expected rate rise has mounted following a rapid fall in unemployment to 7.1 per cent, close to the Bank’s 7 per cent forward guidance threshold for considering possible hikes.

Sterling, which had been higher in the run-up to the figures, fell as much as 0.3 cents following the release of the data as the Bank of England had forecast 0.9 per cent growth over the quarter.

The minutes of January’s policy meeting released last week also revealed that rate-setters thought growth could potentially be even higher.

Capital Economics UK economist Martin Beck said: "This may help to quell murmurs of some support among monetary policy committee members for an interest rate rise sooner rather than later.”

Sam Hill, senior UK economist at RBC Capital Markets, added: “From the Bank of England’s perspective, this is a relatively soft number."

Alex Edwards, of currency exchange company UKForex, said: “In the run-up to the data there were growing expectations that the number would be good, if not better than expectations, with investors keen to buy the rumour.

"It didn’t quite turn out that way, which is why the pound has fallen back below $1.66."

The economy has now posted four successive quarters of positive growth for the first time since 2009/10.

The breakdown of the figures showed services — around three quarters of output — accounting for 0.6 percentage points of the 0.8% growth. Within services, business services and finance,  ranging from the City through to insurers, IT, accountancy and property, were responsible for half the economy’s expansion over the quarter.

With production also growing, the only handbrake on the economy was construction, which shrank 0.3 per cent between October and December.

Economists believe the UK will have finally reclaimed the ground lost to recession by the summer, long after most other major nations.