U.K. Growth Surprise Clears Path for Bank of England Rate Rise

• U.K. Growth Surprise Clears Path for Bank of England Rate Rise

The U.K. economy’s surprise acceleration has paved the way for the Bank of England to raise interest rates for the first time in a decade next week.

The pound rose and investors increased bets on a tightening of monetary policy on Nov. 2 after initial data showed 0.4 percent growth last quarter, more than economists forecast and the fastest pace of the year so far. This is the last major economic report BOE officials will get on the health of the economy before their crucial meeting.

“Today’s growth figures show that, despite the Brexit headwinds, U.K. growth is good enough to give the bank the green light for a rate rise next Thursday,” said Ian Stewart, chief economist at Deloitte.

With inflation at the fastest in more than five years, Governor Mark Carney has said tightening may be needed within months, prompting economists and traders to shift expectations towards an increase in borrowing costs. Such a move would fly in the face of concern about the risks posed by the U.K.’s impending exit from the European Union, against a backdrop of deadlock in talks with leaders over its terms.

Not all officials on the rate-setting panel are convinced that tightening policy is currently a good idea. Deputy Governor Dave Ramsden said this month that measures of domestically-generated inflation are still subdued, while Silvana Tenreyro recently highlighted the risks of raising rates prematurely. But in Carney’s assessment, Brexit has crimped U.K. potential growth, lowering the level of expansion the economy can take without overheating.

Digging deeper into Wednesday’s data, services grew 0.4 percent, industrial production jumped 1 percent and construction shrank the most in five years. The pound was 0.5 percent higher at $1.3201 as of 10:47 a.m. London time.

“It’s hardly a boom,” said Alan Clarke, an economist at Scotiabank in London. “Nonetheless, it removes the last potential hurdle standing in the way of a rate hike at next week’s meeting.”

Even though the latest quarter was better than expected, growth is still running at a weaker pace than it was in 2016. It is also slower than when the BOE has raised interest rates in the past.

Still, there is a “better chance than not that they go in November, but they still have to make the decision,” Mike Amey, managing director at Pimco in London, said in a Bloomberg Television interview. “The first one is always going to be difficult.”

The GDP figures from the Office for National Statistics are a first estimate and based on about 44 percent of the data that will ultimately be available. On an annualized basis, comparable to U.S. data, the U.K. economy grew 1.6 percent in the third quarter. The U.S. is forecast to have expanded 2.5 percent, according to a Bloomberg survey before data on Friday. Carney’s arguments for a hike, however, are mainly centered on the erosion of slack.

The U.K.’s comparatively tepid growth has left it the odd one out in the global upswing. While the IMF raised its forecasts for almost every advanced economy the month, the U.K. outlook was left unchanged. At 1.7 percent this year and 1.5 percent in 2018, it will grow at just half the global average.