British economic growth slowed sharply in the third quarter of 2004 to its weakest since the run-up to the Iraq war early last year, reinforcing expectations that interest rates will not go up again this year. The Office for National Statistics said on Friday that gross domestic product rose by just 0.4 percent in the three months to September, lower than the 0.5 percent gain predicted by analysts and well below the 0.9 percent rise in the second quarter. It was the weakest quarterly growth rate since the first quarter of last year when the threat of war in Iraq seriously hurt consumer and business confidence. The figure also means the economy was running well below its long-term trend growth rate in the third quarter.
Interest rate futures and government bonds immediately rose while the pound fell a quarter of a U.S. cent as the figures reinforced expectations that interest rates will remain on hold at 4.75 percent for the rest of the year and may even have peaked for this cycle. "The markedly below-trend growth should ensure that the Bank of England will leave monetary policy unchanged for the rest of this year," said Howard Archer, economist at Global Insight. "This will allow an extended period to monitor the sustained impact of its five interest rate hikes so far on economic activity and the housing market." At 0.4 percent, third-quarter growth was roughly half what the BoE had predicted in August but policymakers had already noted early this month that the economy had probably been weaker. On the year, GDP rose 3.0 percent, down from a 3.6 percent annual rate in the second quarter. "The economy is still set to expand by three percent-plus this year but the Monetary Policy Committee and Chancellor of the Exchequer's forecasts of a similar increase next year are looking increasingly too optimistic," said Jonathan Loynes, chief UK economist at Capital Economics.///