UK economy unexpectedly picks up speed but Brexit effect felt

LONDON, Jan 26 (Reuters): British economic growth unexpectedly picked up speed in the last three months of 2017, according to official data which showed the impact of Brexit still weighing on the economy but not as heavily as once feared by investors.

Gross domestic product grew at its fastest pace of the year, rising by 0.5 per cent from the previous three months. That was faster than the median forecast for quarterly growth to remain at 0.4 per cent in a Reuters poll of economists.

However, the Office for National Statistics said the big picture remained one of a slower and more uneven expansion in the world's sixth-biggest economy.

In 2017 as a whole, growth was 1.8 per cent compared with 1.9 per cent in 2016, better than many forecasters had predicted at the time of the Brexit referendum but the slowest since 2012.

Sterling added to its recent strong rise against the US dollar and also climbed against the euro. British government bond prices briefly pared their gains.

"Today's data is another positive surprise for the economy that puts pressure on the Bank of England to raise interest rates for a second time sooner rather than later," Jasper Lawler, head of research at London Capital Group, said.

The BoE said last month it expected the economy might have slowed slightly in late 2017. Its interest rate-setters are due to announce their next decision on borrowing costs on Feb. 8.

They raised rates for the first time in more than a decade in November. Most economists have said they expect the next rate hike in late 2018 but some think it could come as soon as May.

Britain's economy grew more weakly than other big rich nations for much of last year as the impact of the 2016 Brexit vote pushed up inflation and many businesses turned cautious ahead of the departure from the European Union in March 2019.

However, Britain has been helped by the recovery in the world economy last year which is expected to carry on in 2018.

Bank of England Governor Mark Carney said earlier on Friday Britain's economy could start to grow more quickly later this year, if there is clarity about Britain's future relationship with the EU.