Analysts predict cut in interest rate

City analysts today predicted another interest rate cut before the end of the year as figures showed the UK economy growing at its weakest annual pace for 12 years during the second quarter.

The Office for National Statistics (ONS) said gross domestic product (GDP) had risen by 0.5% in the three months to June. The figure was unrevised from estimates published last month.

However, the annual growth rate was unexpectedly revised down to 1.5% from 1.8% because of downgrades to back data for public administration, defence, transport and storage and motor trades. It was the weakest annual expansion since the first quarter of 1993.

Economists said the revisions to the annual growth rate underlined the weakness of the UK economy.

The chancellor, Gordon Brown, this week acknowledged that growth for 2005 would be weaker than his forecasts of 3-3.5%, and is expected to give lower estimates in his autumn pre-budget report. The International Monetary Fund and most of the City have forecast growth of around 2%.

"We continue to believe that this [weakness] will help ease core inflationary pressures through further reducing purchasing power and, as such, continue to believe that the Bank of England will need to lower its growth and inflation forecasts in the November inflation report," James Knightley, of ING Financial Markets, said. He believes the Bank will cut borrowing costs in November.

Analyst Howard Archer, of the consultancy Global Insight, also thinks another cut is in store for November as weak growth reduces the risks of inflation.

"Consumer spending remains the key to the outlook," he said. "We believe that it will remain relatively subdued for some time to come, and also have severe reservations about the ability of investment and exports to significantly take up the growth mantle on a sustainable basis in the near term at least."

Earlier this month, the Bank's monetary policy committee kept rates unchanged at 4.5% after easing borrowing costs by a quarter-point in August - the first cut in two years. But the closeness of that decision, with the Bank's governor, Mervyn King, in the minority of a 5-4 vote, surprised the City.

Bank policymakers may take some comfort from news that household spending growth has been revised upwards, as they had suspected it could be. Spending rose by 0.4%, the ONS said, instead of the 0.2% reported last month.

This was partly because of higher estimates for overseas spending - as had been predicted by the monetary policy committee - and also a higher estimate for housing repair and maintenance work.

The ONS released separate data on the balance of payments. The current account recorded a deficit of £3bn in the second quarter, lower than expected and the smallest since the first quarter of 2003.