UK economy expected to rebound, bolstering BoE rate hike case

© Reuters. FILE PHOTO: The City of London’s financial district is seen as people walk across the Millennium Bridge in London, UK, Feb. 16, 2022. REUTERS/Henry Nicholls

By Andy Bruce and David Milliken

LONDON (Reuters) – The UK economy recovered much more than expected in January from the coronavirus-related lull at the end of 2021, according to data from Friday that, along with rising inflation, will increase the chances of an interest rate hike next week.

According to the Office for National Statistics, gross domestic product grew 0.8% month-on-month in January, after falling 0.2% in December. That was the strongest monthly growth since June and more than forecast by one economist in a Reuters poll, which had pointed to 0.2% growth.

All major sectors of the UK economy grew more than expected after the Omicron wave of coronavirus hurt the economy in December, with wholesale and retail, as well as pubs and restaurants as particular drivers, the ONS said.

While growth was likely to continue into February, economists warned of more difficult times ahead.

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

Responding to the data, Finance Minister Rishi Sunak warned that the conflict between Russia and Ukraine had increased uncertainty over the economic outlook and that vigilance was warranted.

With investors focused on the fallout from the conflict in Ukraine, the pound reacted little to the numbers.

According to a Reuters calculation, the UK economy is now 0.8% larger than its pre-pandemic level in February 2020, but remains about 4% smaller than if it had continued to grow at the trend rate for the past ten years.

The ONS said output would be about 1.2% lower than before the pandemic if the additional health care spending were omitted.

Last month, the Bank of England said the economy was expected to grow by about 3.75% this year, with inflation peaking at around 7.25% in April — but those predictions have already been overshadowed by the inflationary fallout from Russia’s inflation. 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 — is likely to bolster bets that BoE policymakers will raise interest rates for the third time in three months next week.

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

“Raising interest rates and taxes at this point would further weaken the UK’s growth prospects, undermining confidence and reducing the finances of households and businesses,” said Suren Thiru, BCC’s head of economics.

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