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Last Updated: Wednesday, 24 January 2007, 10:31 GMT
UK economic growth tops forecasts
People sitting outside of a pub
Services such as restaurants and hotels are main economic drivers
The UK economy grew at its fastest pace in two-and-a-half years during the last three months of 2006, boosted by demand for services, official figures show.

Gross Domestic Product (GDP) rose 0.8% in the fourth quarter from the previous three-month period, the Office for National Statistics said.

On an annual basis, GDP increased by 3% from the same quarter in 2005.

Analysts said the quicker-than-expected growth could add to pressure for an interest rate rise later this year.

'Above trend'

The latest figures mean that overall the economy grew by 2.7% in 2006, close to UK Chancellor Gordon Brown's forecast of 2.75% growth, and up from 1.9% in 2005.

"This above-trend performance is likely to reinforce the Bank of England's concern about the lack of spare capacity in the economy, thereby adding to the pressure for a further interest rate hike," said Howard Archer of Global Insight.

Driving growth at the end of last year was the service sector, which expanded by 1% in the fourth quarter.

Within the services industry, distribution, hotels, catering and retailers expanded by 1.8%, marking the fastest rate of growth in almost five years.

However, the industrial sector contracted by 0.2% in the last quarter as warm weather limited demand for utilities. Output by electricity, gas and water firms was 2.3% lower.

March move?

In separate data on Wednesday, the Bank of England said its rate-setting committee voted by 5 to 4 to raise interest rates in a shock move two weeks ago.

Analysts said the tight vote suggested a rate rise in February was unlikely.

However, on Tuesday, Mervin King, the governor of the Bank of England, warned of the continuing pressure of inflation.

His comments came after recent data showed that higher prices had pushed the rate of UK inflation to its highest level in 11 years, reaching 3% in December.

George Buckley, an economist at Deutsche Bank, said that while he did not think that the Bank of England would raise interest rates next month, he felt that there was a need for a further move and it would probably come in March.


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