Interest rate rise looks more unlikely

FRESH doubt was cast on the chances of another interest rate rise today after new figures showed the UK economy growing more slowly than expected in the first quarter of the year.

Economists had been expecting the Bank of England to revise expected gross domestic product (GDP) growth upwards after last month‘s initial estimate of 0.6%.

But the Office for National Statistics today revealed that GDP growth in the first three months of 2004 was unchanged at 0.6%, down from 0.9% in the previous three-month period.

Economists, however, said that other surveys from industry bodies such as the Confederation of British Industry (CBI), and the Chartered Institute of Purchasing and Supply had all pointed to a higher GDP figure, indicating that the difference may reflect some statistical anomaly rather than any economic factor.

Investec economist David Page said that the Bank of England‘s monetary policy committee would now have to decide what level of faith to put in the official figures and the various business surveys. And he expects to see another rate rise in June.

'It puts the Bank in the curious position of having to make monetary policy using forecasts of growth that they effectively have to second-guess,' Page said.

He said the hawkish tone adopted by the MPC to inflation in recent months meant interest rates were still likely to rise in June.

Simon Rubinsohn, chief economist at stockbrokers Gerrard, expressed scepticism over the true extent of the downturn in profits at major corporations, as reflected in the GDP figures.

'Recent results from companies still appear consistent with a more positive picture. Despite the slightly disappointing headline growth number for the first quarter, we still expect the monetary policy committee to lift interest rates when they meet in the second week of June.'

As if to confirm the maxim that you can lie any number of economists end to end and they still won‘t reach a conclusion, Andrij Halushka, an economist with the Centre for Economics and Business Research, said the chances of a rate rise in June would be reduced in the wake of the GDP figures.

'The markets had expected the economic growth rate to be revised upwards to 0.7%,' he said.

'Today's data, combined with signs of consumer spending cooling off in April, are likely to be interpreted as lowering the probability of the June interest rate rise,' Halushka added.

David Kern, economic adviser to the British Chambers of Commerce, agreed.

'There is no justification for the recent clamour that the MPC should accelerate the pace of interest rate increases,' he said.