By Iain Withers

LONDON (Reuters) -British bank NatWest raised its full-year guidance and made a bumper payout to shareholders on Friday after rising interest rates lifted its finances, despite runaway inflation threatening to crunch the UK economy.

NatWest reported pretax profit up 13% at 2.6 billion pounds ($3.17 billion) for the six months to June 30, ahead of analyst forecasts.

The bank said it would pay an interim dividend of 3.5 pence per share and a special dividend with share consolidation of 1.75 billion pounds, equivalent to 16.8 pence per share.

Taken with an earlier buyback, the bank said it had paid out 3.3 billion pounds in the first half.

The payouts and strong profits had pushed NatWest shares up 8% by 0714 GMT, making them the best performers on the day in the benchmark FTSE index.

A leap in lending income driven by Bank of England interest rate increases boosted NatWest, echoing improvements in the retail businesses of rivals Lloyds and Barclays earlier in the week.

This enabled NatWest to raise its full-year revenue forecast to about 12.5 billion pounds, up from a previous estimate of more than 11 billion pounds. The bank also raised its target for return on equity to between 14% and 16% for 2023.

The bank still counts the government as its largest shareholder – as a result of its taxpayer bailout at the height of the financial crisis – though it returned to majority private control this year.

The Bank of England is expected to increase interest rates again next week, with investors betting on an increase of half a percentage point to 1.75%, in an effort to curb rampant price rises.

Inflation has climbed to 9.4%, a 40-year high, and central bank forecasts due next week could point to inflation peaking at 12% in October.

As central banks lift interest rates, lenders benefit from the widening gap between what they charge borrowers and what they pay savers. But higher interest rates can also trigger defaults as customers struggle to meet repayments.

NatWest said it had contacted 2.7 million consumers and businesses by the end of July to offer help on managing their budgets.

But in a sign of confidence, the bank released 46 million pounds of its bad loans provision because of a low level of actual loan losses, rather than taking a new charge.

“We know that continued increases in the cost of living are impacting people, families and businesses across the UK and we have put in place a range of targeted measures to support those who are likely to need it most,” Chief Executive Alison Rose said.

The bank signalled inflation would hit its chance of meeting cost targets, ditching its goal of cutting costs by 3% next year while maintaining its 3% reduction target for this year.

($1 = 0.8204 pounds)

(Reporting by Iain Withers, additional reporting by Lawrence White; Editing by David Goodman and Bradley Perrett)