U.K. Economy Accelerates, Bolstering Case for Rate Rise -- Update

The U.K. economy accelerated in the third quarter, according to a preliminary estimate Wednesday, strengthening expectations that the Bank of England may raise interest rates as soon as next month.

The Office for National Statistics said U.K. gross domestic product expanded 0.4% in the third quarter compared with the previous three months, an annualized rate of 1.6%.

Sterling rose following the release of the figures, gaining 0.9% against the dollar to $1.3250. U.K. government bond yields also rose.

The performance marked a small improvement from the second quarter, when Britain posted the slowest growth among all 28 countries of the European Union, alongside Portugal, at 0.3%. Yet the economy continues to lag its peers, highlighting how the U.K. has this year partially missed out on a global upswing that has seen many of the world's big economies enjoy a robust and synchronized expansion for the first time since the financial crisis.

The U.S. notched up its best performance in two years in the second quarter, growing by an annualized 3.1%, while the 19-nation eurozone expanded at double the rate recorded by the U.K. An estimate of third-quarter growth in the U.S. is due Friday, with figures for the eurozone scheduled for Tuesday.

Growth in Britain has been hampered by a squeeze on household budgets and subdued investment, twin consequences of voters' decision last year to withdraw from the EU. Annual inflation hit 3% in September as a slide in the pound pushed up prices, while businesses have mostly put off major outlays until the U.K.'s future ties to the EU are clearer.

"The U.K. economy remains locked onto a low growth trajectory," said Suren Thiru, head of economics at the British Chambers of Commerce.

The BOE has signaled that it nevertheless expects to soon raise borrowing costs in the U.K. for the first time in a decade to keep a lid on broader price pressures in the economy. Officials led by Gov. Mark Carney fret that uncertainty over the U.K.'s future ties to the EU is restraining the economy's ability to grow without fueling faster inflation.

Most economists and investors anticipate the central bank will nudge up its benchmark interest rate Nov. 2, to 0.5% from 0.25% currently, reversing a cut implemented in the wake of the referendum. Officials say future increases will likely be gradual and limited.

The anticipated action by the BOE is part of a broader move by central banks to tiptoe back from the extraordinary stimulus they have pumped into their economies over the past decade. In the U.S., the Federal Reserve is expected to raise short-term interest rates for the third time in December, while the European Central Bank is expected on Thursday to pare back its monthly bond purchases.

The ONS said Wednesday that growth in the U.K. in the third quarter was driven by sectors including finance, computer programming and retailers. Manufacturing also aided the expansion, suggesting the weak pound is helping exporters.

"Our order book has never been fuller," said Oliver Gwynne, marketing manager at B&B Precision Engineering (Huddersfield) Ltd., a maker of machine tools in northern England.

British officials are hopeful that a breakthrough in talks with the EU over the terms of the U.K.'s divorce and future relations will help the economy grow faster in 2018. Treasury chief Philip Hammond is due to present his latest tax and spending plans Nov. 22.

EU leaders last week signaled willingness to advance to the next phase of Brexit talks, covering issues such as trade, but said that U.K. Prime Minister Theresa May must first provide more details on how much the U.K. will pay the bloc upon leaving.

Write to Jason Douglas at jason.douglas@wsj.com and Wiktor Szary at Wiktor.Szary@wsj.com

(END) Dow Jones Newswires

October 25, 2017 07:20 ET (11:20 GMT)