Economy hits recovery trail

FRESH signs the worst may be over for Britain's fragile economy emerged today, leading to a warning that the Bank of England may soon raise interest rates.

The National Institute of Economic and Social Research said the next rate move may be up after estimating the economy grew by a forecast-busting 0.4% in the three months to July.

The Chartered Institute of Purchasing and Supply's business activity index also smashed all expectations. Its barometer of the services sector rose to 56.6, from 54.5 in June, against the 50 that divides expansion and contraction, as new business levels increased. The end of the Iraq war and improving economic climate also pushed business confidence to its highest since May of last year.

Philip Shaw, chief economist at Investec, said: 'Evidence that the economy will strengthen over coming months is gathering and it may be that rates have now hit the bottom at 3.5%.'

The Bank's rate-setting meeting starts tomorrow, with a decision due Thursday.