NIESR says UK growth means interest rate hike nearing

Jessica Morris
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Osborne is preparing to deliver a summer budget tomorrow (Source: Getty)

The economy grew 0.7 per cent in the three months to June, from 0.6 per cent in the three months ended May, suggesting Britain's economy grew by expanded 2.7 per cent in the last 12 months.

The forecasts from the National Institute for Economic and Social Research (NIESR) are good news for Chancellor George Osborne who is preparing to deliver his summer budget tomorrow.

Read more: July Budget - here's what's to expect

However, NIESR warned that spare capacity continues to be absorbed meaning that an interest rate hike is drawing closer.

Spare capacity refers to how much room the economy has to grow before it starts stoking inflationary pressures.

"The robust rate of growth exceeds that of the economy's potential over the same period, and so suggests spare capacity continues to be absorbed."

"Consistent with this, we expect the Bank of England to begin increasing [interest rates] in early 2016, most likely coinciding with the February inflation report."

"Of course, risks to this outlook persist, not least the ongoing euro area saga."

Official data released earlier today showed manufacturing output unexpectedly fell in May, while industrial output was stronger-than-expected thanks to oil and gas investment.

"With service sector activity looking healthy in the second quarter and consumer spending seemingly robust, the overall growth in industrial production reinforces our belief that GDP growth could well have picked up to 0.7 per cent quarter-on-quarter," Howard Archer, chief economist at IHS, said.

"However, lacklustre manufacturing activity is worrying for hopes that UK growth can become more balanced and less dependent on the services sector and consumer spending."

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