Growth slows - but don't expect a rate cut

Economic growth slowed in the third quarter, official figures showed today, but it was probably not weak enough to force the Bank of England to cut interest rates again this year.

The Office for National Statistics said gross domestic product (GDP) had risen by 0.4%, in line with expectations, in the three months to September, down from 0.5% in the previous quarter. That still took the annual rate up to 1.6% from a 12-year low of 1.5%.

"The GDP data are unlikely to be weak enough to prompt the MPC (monetary policy committee) into cutting interest rates in November," said Howard Archer of Global Insight.

The prospect of the Bank of England following up its August cut before the end of the year has all but vanished, given recent data and comments from Bank officials.

Minutes released this week of the MPC's October meeting showed that its nine members, who all voted to hold rates at 4.5%, did not even discuss a rate cut.

Meanwhile, figures released yesterday showed an unexpected bounce in retail sales and strong mortgage lending for September, one of the highest monthly lending figures on record.

With signs of resilience in the consumer and housing sectors, the Bank is unlikely to cut rates before next year.

Analysts said today's growth figures contained ammunition for both hawks and doves on the MPC: weak growth should help keep a lid on inflationary pressures and provide support for those who lean towards lower rates, but hawks will argue that GDP growth is being under-recorded and that the more upbeat survey data is a more reliable guide.

"We expect the resulting standoff to mean that rates remain on hold for some months yet, with the next cut coming in February," said John Butler of HSBC bank.

In any case, one thing is clear from today's weak growth figures: they will make for glum reading for Gordon Brown, the chancellor. Mr Brown has been forced to acknowledge that the economy will miss his initial target of between 3% and 3.5%, as stated in his budget.

But the economy is now unlikely to meet his revised target of 2.5% or below. Even to get growth of 2%, the economy would need fourth-quarter expansion of 1.8%.

"With growth likely to remain below trend for some time to come, it seems ever more certain that the chancellor will have to undertake major corrective action sooner or later despite his recent claim that 'there is no need for tax rises based on the spending plans that we have,'" Mr Archer said.

The ONS figures showed that the biggest drag on growth came from weaker oil output because of repairs to fire damage and an unusually large amount of maintenance to gas platforms. By contrast, the ONS found that manufacturing output rose by 0.4% in the quarter and the service sector expanded by 0.6%.

Within the service sector, hotels and restaurants saw their first decline in output since the aftermath of the September 11 attacks on the US, a sign that the July London bombs may have had an impact on tourism in the UK.