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Economic slump hits interest rate hike hopes

Economic slump hits interest rate hike hopes

Category: Economy

Updated: 25/01/2011
First Published: 25/01/2011

This article was correct at the time of publication. It is now over 6 months old so the content may be out of date.

Any chance that interest rates might be about to be increased by the Bank of England appear to have been quashed by a surprise contraction in the UK economy.

The economy suffered a shock 0.5% contraction in the final quarter of 2010, official figures have revealed.

The preliminary estimate by the Office for National Statistics (ONS) had been expected to show a slowdown from the growth of 0.7% reported in the previous quarter, but not to such a dramatic extent.

The ONS said the disruption caused by the bad weather in December is likely to have contributed to most of the decline, but admitted that output would still have been 'flattish' without it.

Output in the construction sector slumped by 3.3% over the period, while in the service industries it decreased by 0.5%. However, output in the production industries continued to climb higher, growing by 0.9%.

Ian Kernohan, economist at Royal London Asset Management, said that even allowing for the impact of the weather, the fall was a considerable downside surprise to expectations and will provoke talk of a double-dip recession.

"I suspect the Monetary Policy Committee will take a calmer view of developments; however, this news supports our view that a rate rise in the UK is still some way off," he added.

Savers have been crying out for the Bank of England to raise interest rates as the rate of return they have been receiving on their nest eggs has been so low.

At the same time, many mortgage borrowers have been praying that rates remain low for even longer, so they can continue to reap the benefits of cheaper home loans.

For now, it appears that mortgage borrowers will continue to be the happier party.

"This is the death knell for any thoughts the Bank of England were having on raising interest rates over the next few months," added Nicholas Leeming, commercial director at

"Good news for anyone on a tracker or SVR mortgage, but new buyer confidence will be knocked and this could have an impact on the property market in the first quarter of this year."

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