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Bank more likely to take action

Interest rate rise moves closer on robust GDP figures

Scottish exportsBusinesses and consumers were urged to prepare for a series of interest rate rises after figures revealed robust economic output over the last three months.

GDP grew 0.7% after a first quarter expansion of 0.4%, said the Office for National Statistics, adding that output per head was now broadly level with the peak reached in the first quarter of 2008.

Second quarter output was 2.6% higher than the same period last year.

ONS chief economist Joe Grice said: “After a slowdown in the first quarter of 2015, overall GDP growth has returned to that typical of the previous two years.”

Last year saw the fastest growth in Britain for eight years, and the latest data is bound to increase pressure to raise interest rates. Some forecasters believe a decision for a rise later this year could come as early as next week.

The second-quarter data is particularly bullish as it covered a General Election when investment plans are usually put on hold.

Services output, which makes up more than three quarters of the economy, was up 0.7% on the quarter.

Factory output dropped by 0.3%, its first quarterly fall in over two years, but a surge in North Sea oil and gas production lifted overall industrial output by 1%, the biggest increase since late 2010.

James Sproule, chief economist at the Institute of Directors, repeated his call last week for an early rise in rates.

“Growth of 0.7% is impressive, but not fast enough to raise concerns that the economy may be overheating. With the economy on more stable footing than it has been for many years, consumers and business should use this opportunity to consolidate and pay down their debts,” he said.

“The Bank of England must now look closely at its interest rate policy. This is the latest piece of evidence which suggests the time to start normalising interest rates is now. The IoD continues to call on the Bank of England to start the gradual process of normalising rates as soon as possible. We would like to see the Monetary Policy Committee vote for a 25 basis point increase when they meet next week.”

Nick Dixon, investment director at Aegon UK, said: “The welcome rise in second quarter GDP points to full-year GDP growth of 2.5% to 3%, underscored by improving business sentiment and rising real earnings being enjoyed consumers. Robust GDP growth will intensify hawkish calls on the Bank of England to normalise monetary policy sooner rather than later, and consumers should now be braced for a steady stream of rate rises, starting in early 2016.”

Calum Bennie, savings expert at Scottish Friendly, said: “After a slowdown in the first quarter of this year, it looks like the economy was just taking a little breather and is now returning back to the type of pace we have come to expect over the last few years.

“With growth getting back up to speed, we should also be prepared for a moderate return of inflation. Providing this trend continues, the Bank of England will be well placed to start to raise interest rates from their historic low.

“A rate rise won’t happen quickly, but for homeowners in particular, this is a blessing as it gives them time to prepare for the inevitable increase in the cost of borrowing. Planning and preparation for rising interest rates will mean that anyone who sees their mortgage repayments climb, can help offset the cost through the money they saved over these coming months.”

Anna Leach, CBI Head of Economic Analysis, said: “As we expected, growth in the UK economy is back on track once again following the loss of momentum over the first quarter.

“We should see similarly decent growth through the rest of the year as low oil prices and inflation help drive consumer spending and business activity outside the oil sector.

“But performance is mixed across sectors, with UK manufacturers going through a tough time as the stronger Pound hits sales into the Eurozone. Meanwhile, the Eurozone is still grappling with uncertainty over the Greek bailout.”

 

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