Early interest rate rise? Why that increasingly looks out of the question

Problems facing slowing UK economy means Bank needs to avoid making things even harder

Last modified on Wed 13 Oct 2021 08.48 EDT

Recent City speculation that the Bank of England may raise interest rates before the year’s end looks wildly premature in the light of the recent performance of the economy.

The picture is clear. Activity rebounded fast in the spring as lockdown restrictions eased, but the pace of recovery has since slowed. In August, according to the Office for National Statistics, output rose by a modest 0.4%, while the previously reported 0.1% rise in July was revised down to a 0.1% fall.

Put in context, that was the first monthly drop in gross domestic product since the start of the pandemic, outside a lockdown period. The “pingdemic”, which forced about 1 million people to stay at home, was largely to blame.

Nor was August anything to write home about. Spending in the hospitality sector rose sharply in the first full month after “freedom day”, partly as a result of more people taking their holidays in the UK this year. But growth would have been weaker had it not been for the boost to North Sea oil and gas production after summer maintenance shutdowns.

When it last produced forecasts for the economy two months ago, the Bank said it was expecting growth of 2.1% in the third quarter of this year, but it would now take an increase in national output of 2.2% in September for that to happen.

That looks out of the question given the bottlenecks in the supply chain that affected the economy last month and the damage caused to consumer and business confidence from rising energy prices. Trade, with imports rising in the latest three months while exports have been falling, will be a drag on growth.

As the gridlock at Felixstowe shows, a lack of HGV drivers will continue to have an impact in the fourth quarter – a period when the economy will have to do without the support provided by the government’s furlough scheme and higher universal credit payments.

In short, the GDP numbers act as a useful corrective to unemployment figures released earlier this week showing record job vacancies and payrolls back to pre-crisis levels. Andrew Bailey, the Bank’s governor, talked recently of the “hard yards” to come for the economy. The Bank needs to ensure it doesn’t make them even harder.

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