The Bank of England is expected to hold central interest rates steady next week, despite October’s GDP decline, economists have warned.
According to the latest data from the Office for National Statistics (ONS), the UK economy unexpectedly shrank in October, marking two consecutive months of negative growth for the first time since the pandemic.
The ONS reported that gross domestic product (GDP) fell by 0.1% in October, contrary to economists’ forecasts of a 0.1% increase.
Despite the economic contraction, economists at the Institute of Chartered Accountants in England and Wales (ICAEW) suggest the Bank of England is likely to maintain the Base Rate at 4.75%, prioritising inflation concerns over short-term growth declines.
Responding to the figures, Suren Thiru, economics director at ICAEW, said: “These figures confirm that the UK economy stalled badly in the run-up to [the Autumn Budget] as falling construction and production output helped drive a surprise decline in overall activity.
“October’s negative outturn means the economy is struggling for momentum as the year draws to a close, with the fallout from the budget and growing global uncertainty likely to have dampened activity in November and December.”
Mr Thiru suggested the UK economic conditions “should fare a little better in 2025”, as the “temporary sugar rush” from stronger public spending and investment could help to lift GDP growth, despite strengthening global headwinds.
However, Mr Thiru warned: “Despite these gloomy figures, the likelihood of a rate cut this month remains low with some policymakers likely to be concerned enough by the recent pick-up in inflation to defer relaxing policy again until February.”
The most recent data shows Consumer Prices Index (CPI) inflation exceeded the Government-set target of 2% in October, rising to 2.3% for October from 1.7% in the previous month.
This marked the sharpest month-on-month rise in the inflation rate in two years, exceeding economists’ expectations of a 2.2% reading for the month.
The surge was primarily driven by rising household energy bills, which are expected to increase again next month. Combined with further price hikes expected to stem from the recent Budget, inflation is set to pose an escalating challenge for the Bank of England in the months ahead.
Inflation plays a key role in the Bank’s monetary policy decisions, often acting as a major consideration when determining whether to adjust interest rates.
The Monetary Policy Committee (MPC) raised the Base Rate to a 16-year high of 5.25% in August 2023 to temper the country’s soaring inflation rate, which hit a peak of 11.1% in October 2022.
The MPC has since reduced the rate twice, bringing it from 5.25% to 4.75% in November.
Alice Haine, personal finance analyst at Bestinvest by Evelyn Partners, the online investment service, said: “Two interest rate cuts this year may have been comforting for those hoping for respite from high borrowing costs, but the Bank of England is widely expected to keep rates on hold at its meeting next week as it assesses the impact of the Chancellor’s raft of borrowing, spending and tax plans.
“With some mortgage lenders choosing to hike mortgage rates in recent weeks amid shifting interest rate expectations and the cost of servicing loans, credit cards and overdrafts still high, the pain is not over for borrowers just yet.”
The Bank of England MPC will announce its next Base Rate decision at midday on Thursday, December 19.
