Rates have peaked, says City

A sharp and surprising downturn in Britain's economy made the City predict yesterday that interest rates have peaked, and signs emerged that the higher cost of borrowing is putting the brakes on the housing market and the manufacturing sector.

Economists said they expected the Bank of England's monetary policy committee to leave rates on hold at 4.75% when it meets in November and for the cost of borrowing not to increase this year.

The Office for National Statistics said gross domestic product growth fell to 0.4% in June to September, less than half the 0.9% growth seen in the previous quarter and the slowest rate for 18 months.

The fall was largely a result of a 1.1% slump in manufacturing - the sharpest decline since the last quarter of 2001.

Jonathan Loynes at Capital Economics said: "The sharper than expected slowdown in the growth of the economy in the third quarter should ensure that interest rates remain on hold at the November MPC meeting and increases the chance that rates have peaked."

Economists think rates could rise again at the beginning of next year before being cut later in 2005. Although the City had forecast a slowdown in growth rates for the third quarter, the outcome was below the consensus expectations of 0.5%.

Economists pointed out that growth was well below the 0.6-0.7% which the Bank regards as a sustainable growth rate.

The dramatic decrease in the rate of growth from the second to the third quarter is the biggest decline since the last quarter of 2002. It is also less than half the amount the MPC forecast in the August inflation report. "This potentially puts downward pressure on the committee's forecast for inflation," said Mr Loynes.

Despite this slowdown, the economy is still growing by 3% compared with the same period a year ago but economists cautioned that forecasts by the MPC and the Treasury for the economy to grow by the same amount next year are starting to look over-optimistic.

The data released yesterday was the first estimate, largely based on forecasts, and is likely to be revised.