Growth figures hit rate cut hopes

Pressure on the Bank of England to lower interest rates today eased as Britain's economy grew at its fastest pace in more than two years in the third quarter.

Gross domestic product rose 0.7% in the July-September period in preliminary figures released by the office of national statistics (ONS), beating City expectations of 0.6%.

"This release will dampen hopes of a near-term rate cut," said HSBC economist Robert Prior.

"Third quarter growth will probably outpace that of any eurozone country and we expect this to remain the case for at least another a year or so. Although the seeds of a bust are being sown in the UK, we do not see a trigger for some time yet and, in the meantime, the housing market bubble looks set to grow and grow."

But the ONS warned that growth figures were flattered by comparison with the second quarter when output was affected by the Jubilee bank holidays.

"Without this effect, GDP growth in the second quarter would have been higher and in the third quarter would have been lower," the ONS said.

Year on year, the economy expanded by 1.7%. Growth was particularly strong in services, which expanded by 0.8% on the quarter and by 2.2% on the year. This was the fastest rate of expansion since the first quarter of 2001. Within the service sector, the distribution, hotels and catering industries showed strong growth compared to last year.

The latest figures could work against a cut in interest rates in early November when the Bank of England's monetary policy committee (MPC) next meets.

Three of the nine members on the rate setting committee voted for a rate cut earlier this month, minutes of their meeting revealed this week. The three dissenters argued in favour of a pre-emptive reduction to shore up the economy against a backdrop of lower shares and slower global growth since the summer.

The surprise split immediately had unleashed speculation of a move to cut rates next month. Interest rates have remained unchanged at 4% for the last 11 months, their lowest level for 38 years. But lower rates have allowed house prices to build up a head of steam - prices rose over 20% in the last 12 months - and some MPC members fear a crash that will pull down the rest of the economy.