UK economic growth accelerates as crunch BOE meeting nears

London - The UK 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% in the three months, beating the 0.3% forecast in a Bloomberg survey. Services rose 0.4%; industrial production jumped 1% while construction shrank the most in five years.

The pound climbed after the report, which is the last major hard data BOE officials will get on the health of the economy before their crucial meeting next week. With inflation at the fastest in more than five years, Governor Mark Carney has said tightening may be needed within months, and economists and traders expect the bank to increase borrowing costs on November 2.

The pound was 0.2% higher at $1.3165 as of 9:45am London time.

Even though the latest quarter was better than expected, growth is still running at a weaker pace than it was in 2016. The pace is also slower than when the BOE has raised interest rates in the past, though Carney’s arguments for a hike are mainly cantered 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," Mike Amey, managing director at Pimco in London, said in a Bloomberg Television interview.

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

Policy mistake

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

But in 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% chance of a BOE rate increase from 0.25% next week, 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 on Wednesday are a first estimate and based on about 44% of the data that will ultimately be available. On an annualised basis, comparable to US data, the UK economy grew 1.6% in the third quarter.

The US is forecast to have expanded 2.5%, according to a Bloomberg survey before data on Friday.

The UK’s comparatively tepid growth has left it the odd one out in the global upswing. While the IMF raised its forecasts for almost every advanced economy the month, the UK outlook was left unchanged.

At 1.7% this year and 1.5% in 2018, it will grow at just half the global average.  

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