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The UK economy unexpectedly contracted in October, with all three main sectors reporting a fall and fuelling concerns over the negative impact of high borrowing costs.

Gross domestic product fell 0.3 per cent between September and October, data published by the Office for National Statistics showed on Wednesday.

Economists had expected no change in GDP after a 0.2 per cent expansion the previous month.

The contraction comes ahead of Thursday’s Bank of England decision on monetary policy; it is expected to keep interest rates unchanged at a 15-year high of 5.25 per cent.

Sterling weakened 0.3 per cent against the dollar to $1.2519 as traders raised their bets that the central bank would be pushed into more rate cuts next year. Gilts strengthened, with the yield on the benchmark 10-year UK government bond falling 0.05 percentage points to 3.9 per cent. Bond yields move inversely to prices.

The GDP data marks a disappointing start to the final quarter after the economy stagnated in the three months to September, suggesting elevated prices and borrowing costs continued to weigh on growth. In October, the economy was no bigger than at the start of the year and smaller than last spring.

Paul Dales, chief UK economist at Capital Economics, said the contraction “may nudge the Bank of England a little close to cutting interest rates, although when leaving rates at 5.25 per cent tomorrow the bank will probably push back against the idea of near-term rate cuts”.

Dales expects the economy to “go nowhere again in Q4 or perhaps is in the mildest of mild recessions”.

The contraction in October could mean that the BoE’s forecast that the UK economy will grow only by 0.1 per cent in the final three months of the year proves too optimistic. Last month, the BoE also predicted that output would stagnate in 2024 as more households and businesses face higher borrowing costs when their fixed-term deals expire.

James Smith, research director at the think-tank Resolution Foundation, said the poor performance of the UK economy in October would reignite speculation about whether the country is back in recession. “But what’s not beyond doubt is that Britain is a stagnation nation,” he said, explaining that growth over the past 18 months was the weakest outside of a recession on record.

The figures lay bare the challenge for the government to boost the economy amid high interest rates.

Chancellor Jeremy Hunt said: “It is inevitable GDP will be subdued whilst interest rates are doing their job to bring down inflation. But the big reductions in business taxation announced in the Autumn Statement mean the economy is now well placed to start growing again.”

Suren Thiru, economics director at the Institute of Chartered Accountants, said the figures put “the prime minister’s target to get the economy growing in jeopardy, with high inflation and borrowing costs likely to suppress economic activity in November and December”.

The ONS data showed that services output fell 0.2 per cent in October, driven by a fall in information and communication, and was the main contributor to the decline in GDP.

Output in consumer-facing services, such as shops, restaurants or hairdressers, dropped 0.1 per cent in October, and remained 5 per cent below its pre-pandemic levels.

This is in contrast with the overall economy that has regained the ground lost during the pandemic and it is well below all other services which grew 7.2 per cent over the same period.

Production output fell 0.8 per cent in October, driven by widespread declines in manufacturing output, following no growth in September and a 0.5 per cent contraction in August.

Construction contracted 0.5 per cent in the month, driven by a sharp fall in new work, which the ONS attributed in part to adverse weather.