UK GDP fell -0.3% in the three months to August, according to statistics from the ONS, with the production sector the main source of weakness.
Industry commentators believe, however, that this is unlikely to impact interest rate rises when the Bank of England’s Monetary Policy Committee next meets on 3 November, as the central bank attempts to balance the emergency gilt-buying operation with its long-term goal of bringing inflation down to the 2% target.
Quilter Investors CIO Marcus Brookes said: “While this figure is not what the country wants to see, it won’t make much of a difference to the path we are already on. The BoE will continue to increase its base rate as it battles to tame runaway inflation.
“The BoE continues to face the incredibly difficult task of guiding the country through this uncertain period where it finds itself in [between] a rock and a hard place by raising rates to meet inflation but embarking on a gilt buying operation to help steady the markets following the turmoil precipitated by the mini budget.
“For investors, however, a lot of this angst is already priced in by the markets, albeit with some additional volatility. The biggest risk, therefore, is that investors flee from the market at just the wrong time and miss out on the opportunities that volatile times bring. Looking for quality businesses is going to be increasingly important as these might be the ones that can ride out this short to medium term volatility and profit from any eventual market rebound,” Brookes added.
The GDP update comes as the BoE takes emergency action to try and stabilise markets, following turmoil in the wake of the chancellor’s mini budget. But some confused messaging from bank governor Andrew Bailey last night and this morning threw some additional upheaval into the mix. He first announced that the central bank would not extend its gilt-buying programme beyond Friday, then seemingly walked that back, before doubling down on the deadline.
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As for what the next MPC meeting has in store, Kingswood investment strategist Rupert Thompson expects a rate increase of either 75bps or 100bps.
Charles Hepworth, Gam investment director, said: “Despite prime minister Liz Truss’s ‘growth, growth, growth’ mantra, the only thing that continues to grow is the expectation of higher rates from the BoE and higher accompanying inflation. When things go wrong, they go wrong in a whole host of ways and the UK can’t seem to catch a break at the moment.”
Jonathan Moyes, head of investment research at Wealth Club, said: “With a significant tightening of financial conditions through September and October, there is certainly a chill in the air. We expect this release to be a sign of the winter to come. The market’s attention will remain firmly fixed on both the chancellor and the BoE as they look to restore confidence and stabilise the government bond market.
“With inflation remaining high, the bank is unlikely to see weak GDP as cause for softening policy. The government on the other hand is clearly looking to stave off a severe recession with loose fiscal policy.”