Faster growth in UK fuels talk of rate rise

But some warn that hike could be policy mistake, given Brexit-related uncertainty

Britain's economy grew more than forecast in the third quarter, which may add fuel to speculation that the Bank of England (BOE) is about to raise interest rates for the first time in a decade.

Gross domestic product rose 0.4 per cent in the three months, beating the 0.3 per cent forecast in a Bloomberg survey. Services rose 0.4 per cent, industrial production jumped 1 per cent, while construction shrank the most in five years.

The pound climbed after yesterday's report, which is the last major hard data BOE officials will get on the economy's health before their crucial meeting next week.

With inflation at the fastest in more than five years, BOE governor Mark Carney has said tightening may be needed within months, and economists and traders expect the bank to increase borrowing costs on Nov 2.

The pound rose 0.2 per cent to US$1.3165 in mid-morning London time.

But even though the latest quarter was better than expected, growth is still running at a weaker pace than it was last year. The pace is also slower than when the BOE has raised interest rates in the past, though Mr Carney's arguments for a hike are mainly based on the erosion of slack.

There is a "better chance than not that they go in November, but they still have to make the decision", Mr Mike Amey, managing director at Pimco in London, said in a Bloomberg Television interview.

With inflation at the fastest in more than five years, BOE governor Mark Carney has said tightening may be needed within months, and economists and traders expect the bank to increase borrowing costs on Nov 2.

"The first one is always going to be difficult."

Some have warned that a hike could be a policy mistake, given the United Kingdom's relatively sluggish growth and Brexit-related uncertainty that is clouding the outlook. They also argue that inflation is being driven by the weaker pound, rather than being domestically generated.

But in Mr Carney's assessment, Brexit has crimped UK potential growth, lowering the level of expansion the economy can take without overheating.

Traders are now pricing in about an 85 per cent chance of a BOE rate increase next week from the current rate of 0.25 per cent, though recent comments from some BOE officials suggest the decision is not yet cut and dried.

The GDP figures from the Office for National Statistics yesterday are a first estimate and based on about 44 per cent of the data that will ultimately be available.

On an annualised basis, com-parable to US data, the UK economy grew 1.6 per cent in the third quarter.

The United States is forecast to have expanded 2.5 per cent, according to a Bloomberg survey before data out tomorrow.

The UK's comparatively tepid growth has left it the odd one out in the global upswing.

While the International Monetary Fund raised its forecasts for almost every advanced economy the month, the UK outlook was left unchanged. At 1.7 per cent this year and 1.5 per cent in 2018, it will grow at just half the global average.

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A version of this article appeared in the print edition of The Straits Times on October 26, 2017, with the headline 'Faster growth in UK fuels talk of rate rise'. Print Edition | Subscribe