By Jon Sindreu and Jason Douglas
LONDON--The British economy picked up in the three months
through June thanks to a rebound in the U.K.'s hefty services
sector, according to preliminary estimates published Tuesday,
raising questions about much longer the Bank of England can keep
interest rates pegged at record lows.
The U.K. Office for National Statistics said Tuesday its
preliminary estimate was that gross domestic product expanded 0.7%
during the second quarter, an annualized rate of 2.8%. That
suggests an acceleration over the first three months of this year,
when GDP grew 0.4%, and would imply that growth per head had
returned to its peak before the financial crisis of 2008, the ONS
said.
The estimated growth was driven by a recovery in the services
sector, which accounts for almost 80% of Britain's economy, thanks
to higher earnings and low inflation, the ONS said. Another key
factor was a big jump in oil and gas production.
The U.K. is expected to outpace all other developed economies in
the Group of Seven this year, according to fresh forecasts by the
International Monetary Fund, after being the top performer in 2014
as well.
A buoyant economy could lead the Bank of England to bring
forward a rise in interest rates, which have remained unchanged at
a record-low 0.5% for more than six years.
In a recent hearing before policy makers, the bank's Governor
Mark Carney said "the point at which interest rates may begin to
rise is moving closer, considering the performance of the
economy."
Still, inflation in the U.K. remains at zero, much below the
BOE's 2% medium-term target. This drives most economists to agree
borrowing costs are unlikely to go up before early 2016, which is
what investors are currently expecting.
"Although today's data may give some ammunition to the more
hawkish elements of the Committee, we still think that a rate rise
will be delayed until next year," said Vicky Redwood, analyst at
Capital Economics.
Also, the BOE confirmed Tuesday the appointment of Gertjan
Vlieghe to its rate-setting panel, the Monetary Policy Committee.
Mr. Vlieghe is currently economist and partner at Brevan Howard
Asset Management LLP, one of Europe's largest hedge funds. Before
his career in financial services, Mr. Vlieghe had spent seven years
at the BOE including a stint as economic assistant to Mervyn King,
Mark Carney's predecessor as governor.
He will replace David Miles Sept. 1, who will come to the end of
his second term at the end of August. Mr. Miles has recently become
more hawkish in his public comments on the timing of an
interest-rate rise.
Tuesday's GDP figures also confirmed some of the ills that have
weighed on the U.K. economy remain in place. Manufacturers, which
are having a challenging 2015, posted a slight fall in production
during the second quarter compared with the prior three months.
Recent surveys indicate factories are continuing continue to
grapple with weak exports, hampered by the strength of the pound
relative to other major currencies.
Write to Jon Sindreu at jon.sindreu@wsj.com and Jason Douglas at
jason.douglas@wsj.com