Latest figures from the Office for National Statistics (ONS) show that the UK economy grew more quickly than expected in the first quarter of 2007, buoyed by the services sector and raising expectations of a base rate rise.

GDP edged up by 0.7 per cent during the quarter to March, ahead of the 0.6 per cent pencilled in by analysts, putting the annual expansion rate at 2.8 per cent, admittedly below the three per cent for the fourth quarter, though still leaving the UK economy on track to register the highest growth among the G7 group of countries this year.

Breaking down the data, the services sector made up 74 per cent of total output although it actually slowed slightly due to weaker retail sales. Services output was up by 0.8 per cent on the quarter and by 3.5 per cent on the year, building on quarterly growth of 0.9 per cent in the fourth quarter of last year.

Any slowing within services was offset by a strengthening in oil extraction and electricity supply and the ONS said gas production fell because of mild weather and increased imports from Norway and the Netherlands following the opening of new pipelines. Output from manufacturing was down by 0.3 per cent on the quarter, despite recent survey evidence that the sector had turned a corner.

Overall, the strong growth environment is likely to add to calls for a hike in interest rates; the Bank of England held firm at 5.25 per cent in April but rates are expected to jump to 5.5 per cent in May.

Worryingly for the indebted, Peter Dixon, an economist at Commerzbank, said that ‘if the UK continues to grow at this kind of pace, it is likely the Bank Of England will have to raise rates by an additional 25 basis points on top of what we’re likely to get in May’.