GDP shock ‘to stop base rate rise’

News that the economy contracted in the fourth quarter of 2010 will prevent a base rate rise, experts have said.

The revelation that gross domestic product (GDP) dipped by 0.5 per cent in the final months of 2010 – notwithstanding the Office for National Statistics blaming the effect of the severe winter weather in December – "should put paid to any thought of a May interest rate hike", according to Trevor Greetham of asset managers Fidelity international.

He argued the economy should still recover, but will need a "loose" monetary policy to remain for this to happen.

A similar view was expressed by Royal London Asset Management economist Ian Kernohan.

He said the Monetary Policy Committee (MPC) will be "calmer" about the prospects for the economy than those reacting to the GDP figures by expressing fears of a double-dip recession, but added: "This news supports our view that a rate rise in the UK is still some way off."

Such a situation may be good news for those struggling to pay their mortgages, for whom fears of repossession may recede, but the debt problems of others may be made worse by the wider economic news.

In particular, those seeking new and better-paid jobs to help pay off what they owe may find it harder to obtain them if the economy is growing slowly and occasionally going into reverse gear.

The views of the experts that a base rate rise will not happen soon came before today's (January 26th) publication of the latest MPC minutes, showing Andrew Sentance is no longer alone in calling for a rate rise, as he was joined by Martin Weale.

Whether this will remain the case next month after the GDP news remains to be seen.

By James Francis