UK economy showing strong growth

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The UK economy grew at a faster than expected rate in the second quarter of 2007, increasing the chance of further interest rate rises to curb inflation.

The Office for National Statistics said gross domestic product (GDP) rose by 0.8% in the three months to June.

That was its sixth consecutive quarter of above-average growth, ahead of analysts' predictions of 0.7%.

Annual growth came in at 3.0%, ahead of the 2.9% forecast. The data led to sterling rising against the dollar.

'In a pickle'

Analyst Gavin Redknap at Standard Chartered said: "The result means that for the sixth straight quarter the UK economy has been growing at or above trend - raising further questions as to the extent of spare capacity in the economy.

It would be no surprise that the Bank is straining on the leash for another quick hike in rates David Brown, analyst Bear Stearns

"For now the data supports the contention that further hikes from the Bank of England are necessary.

"If some of the Bank's Monetary Policy Committee had their way, rates would head higher by August, though there are clearly many in the committee who are worried about monetary policy overkill."

UK interest rates now stand at 5.75%, after having been increased five times since last August as the Bank tries to rein in inflation to the government target of 2%.

Latest data showed it at 2.4% in June.

The Bank's rate policy remained "in a pickle" said David Brown of Bear Stearns, agreeing that further rate hikes were likely.

"UK growth is very strong, inflation is too high and monetary expansion is running far too fast. There is no end in sight to the current rate tightening cycle," he said.

"Since the bulk of growth comes from consumer spending, it leaves domestic demand at risk of over-heating with negative consequences for inflation. It would be no surprise that the Bank is straining on the leash for another quick hike in rates."