Why Britain’s return to growth could put interest rate cut on hold
Britain’s return to growth in the closing weeks of summer throws next month’s predicted cut in interest rates into doubt, economists have said.
The latest official figures showed that UK gross domestic product (GDP) grew by 0.2 per cent in August, after flatlining in June and July. While the outcome was largely in line with forecasts it is nevertheless a boost for Chancellor Rachel Reeves as she prepares to deliver her autumn Budget on October 30.
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Hide AdBank of England rate setters are next set to meet on November 7. Many commentators had been predicting another quarter-point cut in interest rates following August’s long-awaited reduction to 5 per cent. Last month saw the central bank opt to sit on its hands, despite concerns over the strength of the UK economy.
Financial markets are pricing in around an 80 per cent chance of another reduction next month but a cut is not yet certain, according to some experts.
Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales (ICAEW), said August’s positive GDP reading meant a November rate cut was “not a done deal”.
He said: “These figures confirm a reassuring rally in output, as easing inflation and better weather helped return the economy to growth by reviving activity in key sectors, including retail and manufacturing. The UK economy could blow a bit hot and cold over the near term, as the lift to incomes from muted inflation is hindered by growing consumer and business caution amid global geopolitical uncertainty and probable tax hikes.
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Hide Ad“While interest rates are still likely to fall in November, these positive figures mean it’s not quite a done deal by giving the more hawkish rate setters enough encouragement over economic conditions to hold off voting to relax policy.”
Wealth Club’s investment manager Nicholas Hyett noted: “August's GDP growth was broad based, with British brains and British brawn both contributing to healthy growth. This is all welcome news for the Treasury ahead of the Budget which is expected to see taxes rise, potentially slowing economic activity.
“It does raise a conundrum for the Bank of England though. The Bank had been eyeing up further interest rate cuts, but the economy doesn’t look like it’s crying out for more monetary support and with inflation expected to accelerate again into Christmas, rate setters might be thinking it makes sense to sit on their hands a little while longer.”
Thomas Pugh, economist at audit, tax and consulting firm RSM UK, said the outlook for interest rates now probably depends more on the measures set out in this month’s Budget than on the monthly GDP figures. “A cut in November seems a sure bet, but a sequential cut in December is a 50:50 chance,” he added.
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Hide AdThe services sector was the main contributor to GDP growth in August. The smaller production sector swung to 0.5 per cent growth after a 0.7 per cent contraction in July, revised from a 0.8 per cent estimate in last month’s figures.
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