Rates dilemma as economic growth revised downward

● Economists divided over whether MPC will move to raise borrowing costs in May

Interest rates may not need to rise as quickly as expected after the UK economy recorded slower-than-expected growth in the final three months of 2017.

Official figures yesterday revealed that gross domestic product (GDP) grew by just 0.4 per cent between October and December, down from an initial estimate of 0.5 per cent.

For 2017 as a whole, the economy grew by 1.7 per cent, also slightly lower than previously thought and the weakest outcome since 2012.

The Office for National Statistics (ONS) said the fourthquarter adjustment was caused by “a small downward revision” to output from the production industries. It means growth stuttered towards the end of 2017, failing to accelerate beyond the 0.4 per cent recorded during the third quarter.

Andy Haldane, the Bank of England’s chief economist, said earlier this week that the central bank may be forced to hike interest rates at a faster pace than first thought if inflation, global growth and the UK economy unexpectedly pick up speed.

Markets are predicting that the next quarter-point rate rise could come as soon as May and are pencilling in at least three hikes within three years.

However, Samuel Tombs, Pantheon Macroeconomics chief UK economist, said: “This is not an economy that needs cooling with higher interest rates. The downward revision to Q4 GDP puts the UK back at the bottom of the G7 growth leader board for 2017.”

Howard Archer, chief economic advisor at the EY Item Club think-tank, described the latest data as “largely disappointing news” but said he still expected the bank’s monetary policy committee (MPC) to act in the spring.

“The downward revision to UK GDP growth in the fourth quarter of 2017 may dilute expectations that the Bank of England will raise interest rates in May, but we suspect that the MPC remains more likely than not to act then,” noted Archer.

“With the Bank of England keen to gradually normalise monetary policy and the economy likely to see essentially stable growth during 2018, we expect two interest rate hikes this year in May and November. This also assumes that earnings growth will trend up gradually.”

Jacob Deppe, head of trading at online trading platform Infinox, added: “The brief flurry of optimism triggered by December’s breakthrough in Brexit negotiations is looking ever more illusory. This downward revision to fourth-quarter GDP confirms that Britain’s economy ended 2017 with a whimper rather than a bang.”

The powerhouse services sector, which counts for three-quarters of economic growth, expanded by 0.6 per cent during the quarter thanks to a robust performance from business and financial services.

It helped to offset a dismal update from the construction sector, with output falling by 0.7 per cent across Q4.