The UK economy is set for steady expansion this year and next and there is almost a one-in-three chance of an August interest rate rise as both inflation and growth creep higher, a poll showed yesterday.
The median forecast of 25 economists in the quarterly survey, carried out July 19-21, showed growth at 2.4 per cent this year and 2.3 per cent in 2007, slightly higher than a larger sample poll last month which showed 2006 growth at 2.3 per cent.
The UK economy expanded at a quarterly rate of 0.8 per cent in the second quarter, data last week showed, its fastest rate in two years and coming in higher than consensus forecasts of a rise of 0.7 per cent.
Some economists now see rates rising sooner than previously predicted. The median of 14 forecasts showed a 25-30 per cent chance that the Bank of England's Monetary Policy Committee would raise rates at its next meeting in August.
Median forecasts showed rates on hold at 4.5 per cent throughout this year and next, but a significant minority - nine of 22 - saw rates rising to 4.75 per cent by the end of the year, while 13 saw rates steady at 4.5 per cent.
"In terms of the balance of risks, it would be better to put in place a pre-emptive, precautionary small rate rise now than to risk just waiting and not seeing the moderation you're expecting in the third quarter," said Ross Walker at RBS in London.
He now expects rates to rise to 4.75 per cent in August from a previous forecast of rates on hold until after 2007.
Some economists said minutes from the Bank of England's last meeting, released last week and showing a vote of 7-0 in favour of keeping rates on hold in July, had now been overtaken in importance by both GDP and inflation.
Both came in ahead of expectations and have backed arguments that a further rate rise sooner rather than later is warranted.
A record increase in household utility bills pushed the consumer price index (CPI) to an annual rate of 2.5 per cent in June - a nine-month high and further above the bank's 2.0 per cent target.
Mid-point forecasts showed inflation averaging 2.2 per cent this year and two per cent in 2007. Others placed more importance on the minutes and remained unconvinced the upturn in inflation would prompt an earlier rate hike.
"There was nothing in the minutes that suggested the committee was close to moving in August, so we are quite comfortable with our November view (for a rate hike)," said George Johns at Barclays Capital in London.