Rate Rise Now Certain As UK Economy Expands

The UK economy grew by 0.4% in the third quarter, beating analyst forecasts and paving the way for a first interest rate rise in over a decade

David Brenchley 25 October, 2017 | 11:00AM
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A November interest rate rise, the first in more than a decade, is now a “near-certainty”, according to analysts after the UK economy grew by 0.4% in the third quarter.

The first rise in over 10 years will be “largely symbolic”

The Office for National Statistics’ (ONS) first GDP reading for the UK came in slightly ahead of the previous three months as well as consensus estimates.

The services sector increased at the same 0.4% rate as the second quarter of the year, while construction contracted for the second successive quarter, although the ONS points out the construction industry still remains well above its pre-downturn peak.

But manufacturing returned to growth, posting a 1% improvement after a weak Q2. This is significant, says Ross Andrews, director of fixed-rate bond provider Minerva Lending, because manufacturing optimism slumped noticeably during the period.

The year-on-year growth rate was, again, ahead of forecasts at 1.5% - in line with Q2.

Sterling rose on the back of the result, immediately gaining almost half a cent against the US dollar. It was up 0.34% to 1.318 against the dollar at 10.30am and 0.3% to 1.12 against the euro.

Ben Brettell, senior economist at Hargreaves Lansdown, says markets regard a rate rise to 0.5% as a near-certainty. However, he argues that the first rise in over 10 years will be “largely symbolic”, considering it would only reverse last year’s 25 basis point cut.

The big question will be what the Bank of England does after that. Many have been predicting a further 0.25% rise in 2018, but Brettell expects the Bank to “proceed with caution”.

While Brexit-related uncertainty has played a part in a lacklustre year for UK growth, productivity – the key drover of economic growth – has been the underlying problem, he explains. “But economists and policymakers can’t agree on the cause, let alone the solution, to the UK’s productivity puzzle.”

That said, Andrews is seemingly in a minority that reckons the BoE “could still think better of a rate rise next week”. “What will be playing on the minds of those in the corridors of power is the muted response in the figures given the good news we’ve had of late,” he says.

“Consumer confidence was running at a six-month high in September and a fallen pound has helped lighten the export mood recently alongside robust consumer spending.”

The Bank of England will decide whether to raise rates at its next meeting on 2 November.

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David Brenchley

David Brenchley  is a Reporter for Morningstar.co.uk

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