Britain's economy grew faster than expected in the first quarter of 2007, boosting expectations that further interest rate rises are in the offing.
The Office for National Statistics said GDP rose by 0.7 per cent in the January-March period, the third such consecutive quarterly rise. Analysts had predicted a slowing to 0.6 per cent.
That put the annual rate of expansion at 2.8 per cent, down from 3 per cent in the fourth quarter. Sterling rose and British gilts fell as investors anticipated the Bank of England would not only raise rates in May but again after that.
"If the UK continues to grow at this kind of pace, it's likely the BoE will have to raise rates by an additional 25 basis points on top of what we're likely to get in May," said Peter Dixon, economist at Commerzbank.
Most economists expect the BoE to hike interest rates to 5.5 per cent next month after figures last week showed inflation rose to a record 3.1 per cent in March, more than a full point above the central bank's target.
The breakdown of the GDP data revealed that while overall growth was still being driven by services, which make up 74 per cent of total output, that sector had slowed slightly as a result of weaker retail sales.
Output of the service sector was up 0.8 per cent on the quarter and by 3.5 per cent on the year. That followed quarterly growth of 0.9 per cent in the fourth quarter.
That slowing was offset by a strengthening in oil extraction and electricity supply. The first was a result of the opening of the Buzzard oil field in the North Sea while the second went up as a result of two nuclear reactors coming back on stream after being shut for several months last year.
The ONS said gas production, however, fell because of mild weather and increased imports from Norway and the Netherlands following the opening of new pipelines.