The Bank of England could raise interest rates as many as four times over the next 12 months after stronger-than-expected UK economic data bolstered the case for tighter policy. According to City A.M., money markets are now pricing the Bank Rate rising from 3.75% to 4.75% by July 2027.
Official figures released on Friday showed the UK economy grew 0.4% in July, beating forecasts that growth would stall. Against that backdrop, economists say Bank of England governor Andrew Bailey could preside over a rate increase in November, although the Monetary Policy Committee is still widely expected to leave rates unchanged at its meeting next week.
Susannah Streeter, chief investment strategist at Wealth Club, said the stronger-than-expected growth data make a rate hike before Christmas “a touch more likely.” In her view, the main concern is that higher energy costs could feed through into broader price increases for businesses and consumers, though policymakers will probably want more evidence before acting.
At the same time, rising energy prices and elevated bond yields are adding to fears that inflation could pick up again. Streeter said turbulence in energy and bond markets has led investors to expect three to even four rate hikes over the next year. She added, however, that if the economy slows and consumers become more cautious, that could itself help cool inflation pressures.
Andrew Wishard, an economist at Berenberg, said signs that the economy could withstand a single 25-basis-point increase raise the risk of a move in November or December. Even so, he cautioned that because the central bank has struggled to place full confidence in official GDP data, the strong July reading would need to be backed up by broader evidence of solid growth.
Angeline Ong, senior tech analyst at broker IG, said the surprise expansion gives more support to the more hawkish members of the MPC — Huw Pill and Catherine Mann — who are pushing for a fourth-quarter rate increase. She said the upside surprise strengthens the hand of BoE hawks at a time when gilt yields are already near multi-decade highs amid Middle East shipping attacks and firm US data.
UK borrowing costs eased slightly on Friday morning after hitting a 19-year high a day earlier. The yield on 10-year gilts fell by 2 basis points to 5.351%. Oil prices, which had surged earlier in the week, also pulled back, with Brent crude down more than 2.5% on Friday morning to below $105 per barrel.
