Booming economy points to fresh rates rise

The economy has begun the new year firing on all cylinders, according to a batch of figures that will delight the Treasury but almost certainly prompt the Bank of England to raise interest rates next month.

The services sector that makes up two-thirds of the economy posted its sharpest acceleration in growth since Labour won power almost 10 years ago.

House prices posted inflation-busting increases in every region of the UK while the sharpest rise in mortgage approvals in three years pointed to fresh increases in the coming months.

Meanwhile corporate profitability rose at its sharpest rate since records began four decades ago, raising hopes of a recovery in spending by businesses as well as consumers.

Analysts said the figures showed little sign that two interest-rate rises since August had had any effect, and warned another hike was now inevitable.

"To describe this as the straw which breaks the camel's back is not quite accurate, as this morning's release is more than just a straw," said Malcolm Barr, UK economist at JP Morgan, which now expects a hike in February.

A survey of the services sector by the Chartered Institute of Purchasing and Supply showed business activity in December hit its highest level since June 1997.

Roy Ayliffe, a director at Cips, said: "Going into the new year, confidence levels remain high although some reports indicated that difficulties recruiting additional staff contributed to an increase in unfinished work."

Its index jumped to 60.6 last month, its strongest showing since June 1997 and up from 59.8 in November. Any number over 50 denotes growth.

"For those of us who are still hoping that rates can stay on hold in February, this was not the report we wanted," said Geoffrey Dicks, chief UK economist at Royal Bank of Scotland.

The pound, which fell against the dollar on Wednesday, rebounded as traders renewed their bets on higher rates.

The health of the corporate sector was echoed by official figures showing the rate of return for non-financial companies rose to 15.2 per cent in the three months to September, the highest since the series began in 1965.

Michael Saunders, UK economist at Citigroup, said: "In judging the economic outlook for the year ahead, the high and rising rate of return on capital probably is the most important of these indicators in our view."

The upbeat mood was supported by Bank of England data showing total mortgage lending and new loan approvals for homebuyers had hit three-year highs. Mortgage borrowing rose £9.83bn in November, the biggest jump since September 2003. Mortgage approvals, an indicator of the future strength of the market, rose to 129,000 in November, its highest since December 2003.

Howard Archer, chief UK economist at Global Insight, said: "House prices are likely to remain buoyant in the near term as pricing power is tilted towards the vendor ... particularly in London and the South-east where prices are fuelled by elevated City bonuses."

Figures from Nationwide building society showed London was the fastest growing area of England in the final quarter of 2006. It posted annualised growth of 11.3 per cent compared with a UK average of 9.3 per cent.

However growth was spread across the country with Northern Ireland seeing the biggest gain of 44.1 per cent, followed by Scotland on 16 per cent and Wales on 8.9 per cent.

"Overall, we expect the housing market to remain fairly firm across the whole of the UK in 2007," said Fionnuala Earley, Nationwide's group economist.

Separate figures from Mortgage Direct showed that first-time buyers returned to the housing market in record numbers in December, pushing their share of the market up 11 per cent to 48 per cent.