British economy heats up on the factory floor

By Olesya Dmitracova

LONDON (Reuters) - British manufacturing grew at its fastest rate in well over two years at the start of the third quarter, in a strengthening recovery that looks set to boost the economy, a survey showed on Thursday.

The Markit/CIPS Manufacturing Purchasing Managers' Index (PMI) jumped to 54.6 in July from an upwardly revised 52.9 in June, its fourth straight month of expansion.

The reading was the strongest since March 2011 and trumped by a wide margin even the most optimistic forecast in a Reuters poll of economists, triggering a rise in the pound and a fall in the prices of safe-haven British government bonds.

The latest sign that Britain's economy is edging closer to sustainable growth - termed "escape velocity" by the Bank of England's new governor, Mark Carney - will feed into Thursday's discussions at the central bank, which is due to announce its monthly policy decision at 1100 GMT.

Brian Hilliard, economist at Societe Generale, noted the fastest rises in new orders and output since February 2011, at 58.2 and 58.0 respectively.

"Just amazing. What's the need for Carney to do anything?" he said. "It's shaping up for Q3 to be stronger than Q2."

Whether it proves lasting or not, British economic growth is accelerating, with gross domestic product rising 0.6 percent in the second quarter - double the pace of growth in the first.

The International Monetary Fund predicts a 0.9 percent expansion this year, up from a limp 0.2 percent in 2012.

Demand for British wares grew both at home and abroad, including in the euro zone - Britain's main export market.

In addition, stocks of finished goods shrank at the sharpest rate in more than three years, boding well for production in the coming months, survey compiler Markit said.

Factories showed more appetite for hiring than at any point in the last two years, brightening the prospects for employment, an increasingly important gauge of the economy's health.

Economists say the Bank of England is likely to commit to keeping borrowing costs ultra-low until unemployment drops below a specific rate. The bank is due to announce its view on the merits of providing such a steer on interest rates on August 7, alongside its quarterly economic forecasts.

Forward guidance is now seen as the bank's preferred way of supporting the economy and policymakers are unlikely to opt for a resumption of bond purchases on Thursday.

(Editing by Jeremy Gaunt)