UK growth pick-up increases likelihood of November rate hike

Although a 0.4% rise in quarterly gross domestic product wasn't strong enough to boost annual growth, after two quarters of 0.3% gains it shifted the needle on interest rate expectations.

Service sector gains and a return to growth for British manufacturing was always likely given the relative weakness of the pound against the currencies of the UK's main trading partners.

Few economists, however, believed the GDP data represented a turning point for the UK economy: it merely represented a legitimate opportunity for the Bank of England to act against inflation, which hit 3% in September.

Before the third-quarter GDP numbers, there were still some economists who thought the Bank's monetary policy committee (MPC) would delay any rate increase until next year.

Now, almost all see these numbers as justification for a quarter-point increase either at the MPC's December meeting, or, increasingly at next week's gathering.

The analysts say . . .

Most are now saying there's plenty of likelihood of a rate rise next week, but then another long period of inaction from the Bank as it assesses the economic reaction:

Pantheon Macroeconomics - Samuel Tombs: "In one line: Strong enough for a rate hike next week."

He continues, however: "The pickup in GDP growth in Q3 gives the MPC the green light to raise interest rates next week, but it is unlikely that a conventional tightening cycle is about to begin.

"GDP growth, however, is liable to slow again over the next couple of quarters. Real household disposable incomes still have further to fall in the near-term as retailers push through further sterling-related price rises.

Will Mark Carney, BoE governor, join others in the monetary policy committee to vote for rate hike next week? Bank of England

"The lack of substantial progress in Brexit negotiations means that more firms will start to activate contingency plans and delay investment."

Capital Economics - Ruth Gregory: "Today’s GDP figures revealed that the economy re-gained a bit of momentum in the third quarter and have probably sealed the deal on an interest rate hike next week.

"Looking ahead, with inflation likely to fall in 2018, the worst of the real pay squeeze should soon be behind us. And sterling’s decline, along with robust global growth, should boost net trade over the coming quarters. As such, we continue to think that growth will be a reasonable (above-consensus) 2% or so in 2018."

ING - James Smith: "With inflation set to continue outpacing wage growth for several months to come, there are few reasons to expect consumer spending to stage a dramatic recovery.

"And while it looks more likely that the Brexit talks can move to the next stage after December, there is still plenty of political uncertainty for firms to contend with as we head into 2018.

"So, while we expect the Bank of England to increase interest rates next week, the sluggish growth outlook will weigh heavily on the Bank's decision-making process when it comes to further tightening next year."

City Index - Kathleen Brooks: "The big question is where this leaves the Bank of England, which is expected to hike interest rates by 0.25% at its meeting next week.

"There is now an 85% chance of a hike priced in by the UK interest rate futures market, this is up a touch after the GDP report from earlier.

"If the BoE fails to hike then it could lose its credibility or be accused of leading the market up the garden path. However, although the GDP data was better than expected it is not strong and there are pockets of weakness that could come under even more pressure if the BoE does hike interest rates.

"This is not an easy decision for the BoE, however, our base case is that it does hike rates next week, but signals that it will leave a long time, say 9-12 months, before doing so again."

BrickVest - Emmanuel Lumineau: "That UK GDP growth has accelerated to 0.4% in Q3 is good news for the economy and will bolster the case for higher interest rates for the first time in more than a decade.

Few doubters remain

Few still doubt the MPC will move at next week's meeting. However . . .

Minerva Lending - Ross Andrews: "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.

 “If all we can muster, in terms of a payoff, is an acceleration in economic growth that’s so small you could blink and miss it, the Bank of England could still think better of a rate rise next week.”