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Bloomberg) -- The UK economy delivered its strongest quarterly growth in more than a year, a surprising show of resilience that will keep pressure on the Bank of England to raise rates further.

Gross domestic product rose 0.2% from the first quarter, the biggest increase since the start of 2022, the Office for National Statistics said Friday. The Bank of England had expected a 0.1% expansion. Output in June jumped 0.5%, more than double the 0.2% pace expected by economists. 

Manufacturing and construction output were both stronger than expected in June, rebounding from the loss of a working day in May for King Charles III’s coronation. The figures point to momentum in the economy that’s likely to fan upward pressure on wages and prices, underpinning the case for more rate hikes.

“This is an encouraging set of data,” said Kitty Ussher, chief economist at the Institute of Directors. “There was decent growth in both retail and manufacturing.”

The pound rose as much as 0.4% against the dollar to $1.2723, rebounding from a one-week low. Money markets firmed wagers on monetary-policy tightening, putting the chance of a quarter-point increase next month at almost 90% from 80% earlier. A half point of hikes remains priced by March.

UK bonds fell, snapping a three-day run of gains and raising the 10-year yield seven basis points to 4.43%, the highest since Monday.

Consumer spending during the quarter rose 0.7%, its biggest quarterly increase in more than a year. Business investment climbed 3.4%, a similar pace to the previous quarter. There was also a strong increase in government spending. 

Together, these factors offset a drag from net trade, as the volume of imports outpaced exports.

What Bloomberg Economics Says ...

“The economy eked out growth amid rising interest rates and high prices, strengthens our view that the Bank of England will need to generate more weakness to bring inflation down in line with its forecasts.”

—Ana Andrade, Bloomberg economics. Click for the REACT.

The Bank of England is concerned that the economy’s pace, while sluggish by historical standards, is fanning upward pressure on wages and prices. While inflation has edged lower from last year’s high, it remains more than triple the BOE’s 2% target. 

“The better-than-expected GDP figures are likely to galvanize the Bank of England’s zeal to continue to raise interest rates,” said David Baker, a partner at Mazars. “The Bank will remain very concerned about the persistence of inflation and will reflect on near full employment and high wage inflation as reasons to keep policy tight.”

The UK remains the only Group of Seven country that has yet to fully recover from the pandemic, with output last quarter 0.2% below its level at the end of 2019. 

Prime Minister Rishi Sunak is counting on an economic revival to rescue his Conservative Party before a general election expected late next year. However, the figures for the latest quarter may mark a high point, with analysts expecting further interest-rate increases to weigh on activity in the months ahead.  

“We’re laying the strong foundations needed to grow the economy,” Chancellor of the Exchequer Jeremy Hunt said in a statement. “The Bank of England are now forecasting that we will avoid recession, and if we stick to our plan to help people into work and boost business investment.”

The second quarter saw a series of disruptions, with output in April rebounding from widespread strikes the month before. GDP shrank 0.1% in May due to an extra public holiday for the King’s coronation.

While the BOE expects a more meaningful expansion in the third quarter, economists are more pessimistic, citing a sharp loss of momentum signaled by recent purchasing manager surveys. 

“The UK economy remains in a precarious place,” said David Bharier, head of research at the British Chambers of Commerce. “Businesses are continuing to face a worrying mix of high inflation, rising interest rates, a tight labor market, and global economic uncertainty.”

Bloomberg Economics predicts a yearlong recession starting at the end of 2023. While shallow in historic terms, the downturn would keep GDP below 2019 levels until 2026. Others are less pessimistic. 

“We expect the UK to avoid a recession both this year and next,” said Paula Bejarano Carbo, an economist at the National Institute of Economic and Social Research. 

Living standards are expected to receive a boost as inflation drops below the pace of wage growth. For many, however, any benefits are likely to be swallowed up by more expensive home loans and rents.

Millions of households are facing a severe shock as they are forced to refinance fixed-rate mortgages at significantly higher rates.

“There’s a continued risk here that we see policy failure and that we rates hike too much,” Charles White-Thomson, chief executive officer at Saxo Markets UK, said on Bloomberg TV. 

(Updates with market reaction.)