ONS: UK economy unexpectedly shrinks by 0.1% in October – what does it mean for interest rates?

The UK economy unexpectedly shrank in the three months to October, increasing the likelihood interest rates are cut later this month.

Gross Domestic Product (GDP) fell by 0.1%, according to the latest figures from the Office for National Statistics (ONS), following growth of 0.1% in the three months to September and 0.2% in the three months to August. Economists had predicted a 0.1% rise in October.

Growth in the services sector flatlined while the production and construction industries saw a fall of 0.5% and 0.3%, respectively.

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The fall in the production sector was mainly triggered by less vehicle manufacturing. Jaguar Land Rover was hit by a major cyber attack at the end of August which stalled production lines for weeks.

Scott Gardner, investment strategist at investment banking company J.P. Morgan, said pre-Budget jitters also contributed to October’s downbeat GDP figures.

“Speculation about potential Budget announcements had a numbing effect on consumers and businesses in the lead up to the chancellor’s speech at the end of November,” Gardner said.

The latest GDP figures will come as a blow to chancellor Rachel Reeves as she looks to get the UK economy back on track.

The Labour government has made growth one of its main priorities, but quarterly ONS figures suggest GDP has slowed since the start of 2025.

Rob Wood, chief UK economist at Pantheon Macroeconomics, suggested October’s poor GDP figures could see this trend continue.

“Weaker-than-expected GDP growth drags our call for Quarter Four GDP growth down to 0.1% quarter-to-quarter, below the Monetary Policy Committee’s (MPC) forecast of 0.3%,” Wood said.

An HM Treasury spokesperson said: “We are determined to defy the forecasts on growth and create good jobs, so everyone is better off, while also helping us invest in better public services.

“That is why the chancellor is taking £150 off energy bills, protecting record investment in our infrastructure, and we are backing major planning reforms, the expansion of Heathrow and Gatwick airports, and the construction of Sizewell C.”

Credit: ONS

Low growth increases chances of a base rate cut

The Bank of England’s MPC will be watching today’s GDP figures closely as it weighs up what to do when it reviews the base rate on 18 December.

The Consumer Price Index (CPI) measure of inflation is still above the bank’s 2% target at 3.6%. However, the MPC said in November it believes inflation has peaked, partly due to an easing in rising wages.

Clare Lombardelli told the Commons’ Treasury Committee this week measures announced in the Budget, including cutting energy prices and freezing rail fares, could also knock half a percentage point off inflation from April 2026.

Interest rates are already being heavily tipped to come down from 4% to 3.75% next week. In a research note published this week, HSBC said it expects the BoE to cut the base rate by 25 basis points to 3.75%.

This, HSBC said, is in line with market expectations, which is pricing in a 93% chance of a cut.

Wood, from Pantheon Macroeconomics, said the surprise October GDP figures would strengthen the case for a cut.

“Weak GDP adds to the reasons for the MPC to cut interest rates next week. Rate setters would need a huge surprise in inflation and the labour market data published next week to stop a cut,” Wood said.

November’s CPI inflation data is out on 17 December while labour market data is published on 16 December.