UK Economy Surges Expectedly, Bolstering BoE Rate Hike Case

Britain's economy rebounded much more than expected in January from its coronavirus-related lull in late 2021, according to data on Friday that, along with soaring inflation, raises the likelihood of an interest rate hike next week.

The Office for National Statistics said gross domestic product grew by 0.8% in month-on-month terms in January after a 0.2% decline in December. That was the strongest monthly expansion since June and more than forecast by any economist in a Reuters poll which had pointed to growth of 0.2%.

All the main sectors of Britain's economy grew by more than expected after the Omicron wave of coronavirus hurt the economy in December, with the wholesale and retail sector as well as pubs and restaurants being particular drivers, the ONS said.

While growth looked likely to continue into February, economists warned of tougher times ahead.

"The cost of living crisis and the influence of the war in Ukraine probably means this is as good as it gets for the year," said Paul Dales, chief UK economist at consultancy Capital Economics.

Responding to the data, finance minister Rishi Sunak warned that the Russia-Ukraine conflict had raised uncertainty around the economic outlook and that it warranted vigilance.

With investors focused on the consequences of the conflict in Ukraine, the pound showed little reaction to the data.

The British economy now stands 0.8% larger than its pre-pandemic level in February 2020 but it remains about 4% smaller than if it had continued growing at its trend rate for the last decade, according to a Reuters calculation.

The ONS said output would be around 1.2% below its pre-pandemic size if extra spending on healthcare was stripped out.

Last month the Bank of England said the economy looked set to grow around 3.75% this year, with inflation peaking at around 7.25% in April - but those forecasts have already been eclipsed by the inflationary consequences of Russia's invasion of Ukraine for financial markets and international trade.

Still, the strength of the economy shown in Friday's data - in addition to galloping inflation - will likely bolster bets that BoE policymakers will raise interest rates next week for the third time in the space of three months.

The British Chambers of Commerce (BCC) warned this could prove to be a mistake.

"Raising interest rates and taxes at this time would weaken the UK's growth prospects further, by undermining confidence and diminishing households' and firms' finances," BCC head of economics Suren Thiru said.