UK economy grows less than expected in August, but markets remain cautious

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UK economy grows less than expected in August, but markets remain cautious

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 will increase interest rates.

The Office for National Statistics said UK economy grew 0.4% in August, leaving it lower than it was in February 2020, leaving it 0.8% smaller than it was in the previous month. Economists polled by Reuters had forecast monthly gross domestic product growth of 0.5% in August.

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

At 1340 GMT the pound rose 0.4% at $1.3641, but not far from a two-week high touched on Monday.

The BoE, faced with an inflation spike in the past few years, looks set to be the first major central bank to raise interest rates since the beginning of the pandemic. An investor is betting on a rise to 0.15% in December.

Over the weekend, BoE Governor Michael Saunders stressed the need to stop inflation from becoming permanent embedded, and Fellow Policymaker Andrew Bailey said households must brace for significantly earlier interest rate rises.

But some analysts have pointed out that sterling had failed to react to renewed dispute over 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 the GBP than it is, said Marshall Gittler, head of investment research at BDSwiss Holding.

A further statement from the French government spokesman Gabriel Attal said France was working on retaliatory measures in its post-Brexit fishing dispute with Britain.

Against the euro, sterling edged 0.1% higher to 84.78 pence, not far from a two-month high touched this week.