British Economy Expands
Wednesday January 24, 12:01 pm ET
By Jane Wardell, AP Business Writer
British Economy Growing Faster Than Expected
LONDON (AP) -- Britain's economy grew at a healthier than expected rate in the fourth quarter, while the latest interest rate increase came on the slimmest of margins, officials said Wednesday -- helping the pound pull back from the brink of $2.
Economists said the slim vote by the Bank of England's monetary policy committee earlier this month also threw into doubt the timing of another rate hike, which most had previously expected as early as next month.
They said one more quarter-point nudge from the current 5.25 percent remained on the cards for the first part of the year, but added that one further rise would now likely complete the current cycle.
That view was bolstered by comments from Bank of England Governor Mervyn King late Tuesday that January's rate hike was a pre-emptive strike to avoid even higher rates in the long run and that he expected that inflation has probably almost peaked.
King said that many of the factors responsible for the pickup in inflation over 2006 -- oil prices in particular -- were likely to unwind in the second half of this year, "possibly quite sharply."
Inflation rose to an annualized 3 percent for the first time in 10 years in December, well above the bank's target of 2 percent and just shy of the 3.1 percent level that requires King to write an explanatory letter to Treasury chief Gordon Brown.
"We believe that 5.5 percent will mark the peak in rates as growth loses some momentum over the coming months and inflation heads back down," said Global Insight chief U.K. economist Howard Archer.
Last month's unexpected rate hike had fueled the pound's recent rise against the U.S. dollar to within one cent of the $2 level on Tuesday, sending the British currency to its highest level since the week before the so-called "Black Wednesday" in September 1992 when Britain crashed out of the European Exchange Rate Mechanism.
The revelation of the tight vote pulled the pound back under $1.97.
"A test of $2 is off the cards for the time being," said David Brown, European economist at Bear Stearns.
However, the pound is likely to resume its upward trajectory if the bank raises rates again in the coming months. Analysts also point to recent strong merger and acquisition activity as well as London's pre-eminent position in the financial world.
A strong pound is usually good news for British shoppers, but can hurt exporters at a time when the British economy is growing.
Figures released Wednesday showed the economy grew at its fastest pace in two-and-a-half years during the last three months of 2006.
Archer said that strong growth lent credibility to the chance of at least one more rate hike in the current cycle.
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