Economy slows but rates seen on hold

The British economy slowed in the third quarter, but not enough to dislodge building expectations that interest rates will stay on hold for the rest of the year.

Britain's Office for National Statistics said that the world's fourth largest economy expanded by 0.4 per cent in the three months to September, down a tenth of a point from the previous quarter and well below the long-term average.

Year-on-year growth rose to 1.6 per cent from 1.5 per cent in the second quarter.

Most of the quarterly slowdown was because of maintenance work in the oil and gas industry and Bank of England policymakers may well judge the real pace of growth has not changed.

"The UK economy continues to languish at a below-trend rate of growth. However, the weakness is probably not pronounced enough to trigger an immediate BoE rate cut in November," said Holger Schmieding, economist at Bank of America.

For now, the BoE's Monetary Policy Committee, like their central banking colleagues in the US and the eurozone seem more exercised that soaring oil prices could push up inflation if consumers start demanding compensatory pay rises.

Some of the MPC, however, are also worried that growth may disappoint their own forecasts and many economists are predicting further interest rate cuts in the New Year.

Chancellor Gordon Brown's budget forecast of 3.0 to 3.5 per cent growth this year certainly now looks unattainable.

Mr Brown signalled that might be the case in September, hinting that growth would more likely come in at 2.0 to 2.5 per cent but economists said even this looked optimistic now.

"For 2005 as a whole, the economy is on track for 1.6-1.7 per cent GDP growth, which would be the weakest full-year performance since 1992," said Ross Walker, economist at RBS Financial Markets.