UK growth sparks rate rise speculation

Expectations of an interest rate rise strengthened today as Britain's economy grew at its fastest rate in two years from April to June.

Gross domestic product rose by 0.8% in the second quarter, the Office for National Statistics reported in preliminary estimates.

The figures exceeded forecasts of 0.7% and increased the prospects that the Bank of England would raise borrowing costs sooner rather than later.

But economists were unsure whether a rate rise would come as soon as next month as today's figures were in line with the Bank's growth projections in its May inflation report.

"The BoE expected stronger GDP growth in the near term so the 2.6% year-on-year GDP growth rate observed is not necessarily a trigger for a rate hike in the near future," said HSBC economists.

The Bank's monetary policy committee this month held interest rates at 4.5% for the 11th month running, but inflation is picking up.

The cost of living in the year to June was up by 2.5%, on the back of higher gas and electricity prices, well above the Bank's 2% target.

The ONS said growth in the second quarter was boosted by the services sector, which grew by 1% after 0.7% growth in the first three months of the year.

Retailing helped as well, boosted by the World Cup. Growth in the distribution, hotels and catering sectors doubled to 1.2%, the ONS reported.

Figures from the ONS yesterday showed that retail sales in the period from April to June were 2.1% higher than the previous three months, the sharpest growth since February 2004.

But analysts doubted that consumers could sustain the trend of higher spending with moderate earnings growth and soaring utility bills.

"In addition, while business investment and exports should be relatively healthy in the near term, exports could well suffer later on this year and in 2007 from a loss of momentum in global growth," said Howard Archer of Global Insight.