Growth may prompt higher rates

Car manufacturers are increasing exports to Europe

The Bank of England may come under new pressure to raise interest rates, after economic growth figures released on Wednesday showed accelerating household spending.

The UK's gross domestic product rose by 0.9% in the second quarter of the year, the Office for National Statistics said, bringing year on year growth in the economy to 3.1%, in line with analysts' forecasts.

But the breakdown of the data revealed that household spending, a marker keenly watched by the Bank of England committee which sets interest rates, rose by 0.8% between April and June, up from 0.6% the quarter before.

"[This is] not particularly good news for interest rates," said Adam Chester, economist at the Halifax bank.

"Private consumption is very strong and this is something the [Bank of England] will be very concerned about."

Rates higher at year end

Wednesday's news made it more likely that the Bank of England's monetary policy would raise rates to 6.25% at either its September or October meeting, Lloyds TSB economist Trevor Williams said.

"The figures suggest speculation about higher interest rates will intensify," said Mr Williams, who foresaw rates reaching 6.5% by the end of the year to curb worries of rising inflation.

But other observers said that, when taking a broader view of the economy, inflation was not a concern.

"The economy is growing strongly because of low inflation," said Darren Winder at UBS Warburg. "That's the point. And the strongest growth is in areas such as telecoms where prices are falling fastest."

Other areas of increasing household expenditure identified in Wednesday's data were food, energy and transport, with purchases of high street goods showing shallower growth.

Manufacturing revival

The data also showed a revival in the UK's struggling manufacturing sector, which recorded output up 0.4% following a decline in the first three months of 2000.

Output from production industries as a whole rose by 1.4%, after a poor first quarter, while the ONS revised growth in services back 0.1% to 0.9% between April and June.

The ONS also revealed figures showing that Britain's deficit in global trade stood at £2.27bn, an improvement of £70m on May's revised figure of £2.34, and slightly better than analysts' had forecast.

A rise in car exports to the Continent helped the UK's deficit in trade with EU countries narrow to £131m, compared to £576 the previous month.

But the UK's deficit in trade with non-EU countries slipped to £2.8bn in July, from £2.15 in June, a trend the ONS said was set to continue.