Bank of England set to hike rates in November after UK economy grows more than expected

The Bank of England is firmly on track to hike interest rates next week, after the UK economy grew slightly more than expected in the third quarter of the year, according to official figures released on Wednesday (25 October).

The Office for National Statistics (ONS) reported that Britain's gross domestic product (GDP) grew 0.4% on a quarterly basis in the three months to the end of September, up from the 0.3% recorded in the previous quarter, which analysts expected to remain unchanged.

On a year-on-year basis, meanwhile, Britain's economy expanded 1.5% in the third quarter, matching both analysts' expectations and the rate of expansion recorded in the corresponding period 12 months ago.

​"​These numbers do not change the big picture for the UK, which is of an economy that has slowed due to higher inflation linked to the weak pound and Brexit-related uncertainty dragging on business investment," said ​John Hawksworth, chief economist at PwC.

"But we should not overdo the gloom as there is nothing in this or other recent data to suggest that the slowdown is in danger of turning into a recession."

The ONS added output from the services sector increased by 0.4%, the same rate as the previous three months and remained the largest contributor to GDP growth, while the manufacturing sector returned to growth.

The data comes a week ahead of the BoE's meeting, during which the Bank is widely expected to announce an increase in interest rates for the first time in a decade.

There is now an 85% chance of a hike priced in by the UK interest rate futures market and Kathleen Brooks, research director at City Index, said if the BoE fails to hike then it could lose its credibility or be accused of leading the market "up the garden path".

However, although the GDP data was better than expected it is not strong and there are pockets of weakness that could come under even more pressure if the BoE does hike interest rates.

"This is not an easy decision for the BoE, as we have mentioned before, however, our base case is that the BoE does hike rates next week, but signals that it will leave a long time, say 9-12 months, before doing so again," she added.

"This could cause the pound to drop, as right now the market is betting on the prospect of two rate rises for 2018, which we believe is too optimistic."

Last week, the ONS said retail sales fell more than expected in September as Britons reined in their spending, with quarterly growth falling to a four-year low.

That came after Britain's statistical office warned wages continued to lag behind inflation, which hit the highest level since April 2012 last month, as it rose to 3%.

Average weekly earnings rose by 2.2% year-on-year, in line with the gain recorded in the previous month and slightly above the 2.1% figure analysts expected.

However, when the impact of inflation is factored in, real weekly wages fell by 0.3%, when including bonuses and by 0.4% when excluding bonuses, compared with a year earlier.