The ONS points to strong growth and a strong £

New Figures Show Domestic Economy Booming Still

Publication of new statistics increase the likelihood of a fourth rise in interest rates since the general election.

The UK's gross domestic product (GDP) hit an annual growth rate of 3.4% compared with 3.1% for the first three months of the year.

The figures showed GDP grew 0.9% since the last quarter, the same level as that achieved in the previous three months.

David Bloom of HSBC James Capel warned that the latest figures did not yet include any sizeable impact from "windfall" gains - payouts made to members of building societies that have converted to banks.

"In the third quarter they should come through by the bucket-load, pushing the service sector to levels where inflation pressures will further exert themselves," he explained.

But the director of research at Nikko Europe, Simon Briscoe, said GDP was growing at a weaker rate than at the end of last year. "This is the last important piece of data before the next Bank of England meeting and its relative weakness eases the pressure to raise rates," he said.

This is the fourth piece of important economic data to point to a likely increase in the cost of borrowing by the Bank of England next month.

The data, from the Office for National Statistics (ONS), also confirmed the growth was led by the services sector, which enjoyed an annual growth of 4.5%, or 1.3% on a three-monthly basis.

The ONS said: "Services growth was widespread. Business services continues to show the highest growth. The transport and communication, and distribution, hotels and catering industries also grew strongly." But manufacturing output growth was broadly flat, it said.

On Wednesday the Confederation of British Industry said domestic demand rose at the fastest rate since April 1995, while manufacturers' export orders over the past four months fell at the fastest rate since October 1991.

It also found manufacturers' optimism about exports for the year ahead has now fallen at the fastest rate since the early years of the Thatcher administration in October 1980.

The day before, the British Chambers of Commerce found the value of the pound - which yesterday hit an eight-year high, driven up by hopes of rate rises - had reduced export orders to a five-year low.

Official figures also showed retail sales growth had hit heights not seen since the boom era of the late 1980s.

The City believes the domestic boom will mean the Bank of England's Monetary Policy Committee will raise interest rates when it meets on August 7.

But the Bank accepts that it is faced with a policy dilemma, as raising rates will send the pound soaring further on the foreign exchanges, punishing exporters even more.

There was some relief in the City as the figures were slightly lower than forecasts by economists, who had expected an annual rise of 3.5% and a quarterly increase of 1.0%.