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Future decisions on interest rates will be “more finely balanced”, the Bank of England’s chief economist said on Thursday following the release of figures suggesting the UK economy was near-stagnant in the third quarter.
Gross domestic product rose 0.2 per cent between July and August, driven by a service sector recovery, the Office for National Statistics said. But the increase followed a contraction of 0.6 per cent the previous month when strikes and wet weather disrupted economic activity.
Huw Pill, speaking at the Marrakech Economic Festival in Morocco, warned against the idea that central banks would change course in response to very short-term developments in data, saying: “The idea that policy response or stance will turn on a sixpence is overdrawn.”
But Pill also said that much of the effect of the BoE’s monetary tightening over the past two years was still feeding through to the economy. “Whether we’ve done enough or whether we have more to do, I think is becoming a more finely balanced issue,” he said.
His comments are likely to reinforce expectations that the Bank of England will keep interest rates unchanged at 5.25 per cent when its monetary policy committee meets next month, aiming to bring inflation back to target by keeping policy tight rather than tightening it further.
Swati Dhingra, one of the most dovish members of the monetary policy committee, also on Thursday said that high interest rates were dampening growth, affecting the lives of the young and more vulnerable in particular.
“The economy’s already flatlined. And we think only about 20 per cent or 25 per cent of the impact of the interest rate hikes have been fed through to the economy,” Dhingra told the BBC.
Dhingra, who has voted against further rate increases since joining the MPC in August 2022, also noted that, like high inflation, “interest rates will also typically impact younger, less educated people more”.
The BoE in September held interest rates at 5.25 per cent, signalling the peak of borrowing costs after almost two years of rate rises.
The ONS data on Thursday showed that in August, the economy was smaller than its 2022 peak last May, indicating the persistent effect of high inflation and borrowing costs on UK output.
GDP figures suggest “the tough medicine of very rapid interest rate rises is starting to take effect”, said Sandra Horsfield, economist at Investec.
“The economy entered a broad-based slowdown in late summer, which has deteriorated further in recent months,” said Yael Selfin, chief economist at the consultancy KPMG UK.
“The UK economy continues to feel the strain from elevated prices and high interest rates, with the full impact of past tightening still to be felt,” she added.
Further signs of the impact of high borrowing costs on the economy came on Thursday from the Bank of England’s credit condition survey, a quarterly survey of banks and building societies.
It showed the proportion of lenders reporting an increase in household defaults on mortgages over the past three months minus those reporting a decrease, rose to 43 per cent, the highest since the second quarter of 2009.
Default expectations for the next three months were even higher.
Sanjay Raja, economist at Deutsche Bank, said he expected “growth to turn sluggish through the next few quarters with the UK economy walking a fine line between recession and stagnation”.
Services output rose 0.4 per cent in August 2023 and was the main contributor to GDP growth, spurred by the professional services and education sectors.
Education activity was disrupted in July due to walkouts by teachers across the country leading to school closures.
Samuel Tombs, economist at Pantheon Macroeconomics, said the muted rebound in August reflected increased output in the education and health sectors as strike disruption receded, “rather than underlying momentum” in the wider economy.
Output in consumer-facing services, such as entertainment, bars and restaurants, fell 0.6 per cent in August and remained 4.3 per cent below its February 2020 levels, before the Covid-19 pandemic.
Kitty Ussher, chief economist at the Institute of Directors, said the fallback showed that “recent interest rate rises are causing households to budget carefully in the face of rising mortgage costs”.
Manufacturing output was down 0.8 per cent in August, while construction registered a 0.5 per cent fall. This marked a continuation of the contraction of the previous month.
More timely business surveys, such as the purchasing managers’ index, forecast further downturns in manufacturing and construction output in September.
