UK economy grows less than expected in August, but expects Bank of England to raise rates

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UK economy grows less than expected in August, but expects Bank of England to raise rates

LONDON, Oct 13 Reuters - Sterling edged higher on Wednesday as traders assessed that data showing the British economy grew slightly below consensus in August was not enough to dent expectations that the Bank of England BoE would increase rates.

Its economy grew 0.4% in August, leaving the Office for National Statistics to produce a GDP just 0.8% larger than it was in February 2020, the office said. Economists polled by Reuters had forecast monthly GDP growth of 0.5% for August.

Economic data this week, including UK jobs figures for September, which came in largely in line with forecasts, gave no reasons for markets to cut back their aggressive pricing for Bank of England tightening ING told clients in a note.

The BoE, facing a jump in inflation, looks set to be the first major central bank with interest rates to increase since the start of the pandemic. Investors are betting on a jump to 0.15% by December.

The pound hit a two-week high against the dollar on Monday after BoE governor Michael Saunders announced the need to ensure inflation is permanently embedded and fellow policymaker Andrew Bailey said households must brace for significantly earlier interest rate rises.

At 0825 GMT, sterling rose 0.3% against the dollar to $1.3635. Against the euro, it edged 0.1% higher at 84.75, not far from a two-month high touched this week.

But some analysts have pointed out that the Sterling had failed to react to renewed post-Brexit disputes over the Northern Irish Protocol, which governs trade in the province.

I think Brexit and trade should be a bigger issue for GBP than it is, said Marshall Gittler, head of investment research at BDSwiss Holding.

British Minister David Frost told the EU on Tuesday that significant changes to post-Brexit rules were the only way for them to draw poison from their relations.

The European Commission will later put in Northern Ireland a package of measures for the transit of goods from Britain to Northern Ireland.