Four rate hikes in sight as UK growth defies expectations

Money markets are now pricing in four quarter-point increases in Bank Rate by July 2027 – a trajectory that would lift borrowing costs from 3.75% to 4.75% – after official figures showed the UK economy grew by 0.4% in July, a result that caught analysts off guard and bolstered the case for an earlier move on rates.

The Office for National Statistics (ONS) data, published on Friday, pushed gilt yields back toward multi-year highs and intensified debate over whether the Monetary Policy Committee (MPC) will act as soon as November. The 10-year gilt yield stood at 5.351% on Friday morning, having touched 19-year highs on Thursday before easing slightly, as energy market turbulence continued to keep bond investors on edge.

Why GDP growth has shifted the calculus

Economists had expected summer spending – boosted by the World Cup and heatwaves – to fade in July. Instead, the economy proved unexpectedly resilient, a reading that analysts say makes a pre-Christmas rate hike more difficult for the MPC to avoid.

Andrew Wishart, senior UK economist at Berenberg, said the surprise reading suggested interest rates were not bearing down on demand as much as the Bank of England may have assumed. He said evidence that the economy could cope with a 25-basis-point hike "adds to the risk that the Bank of England will deliver one in November or December," though he cautioned that the central bank would need to see broader confirmation of solid growth before acting on a single strong data point.

Rob Wood, chief UK economist at Pantheon Macroeconomics, was more direct, arguing that rate setters were "well off course" if they continued to assume that current borrowing costs were operating in restrictive territory.

What does this mean for the mortgage market?

The immediate consequence for the mortgage market has been further upward pressure on fixed rates. Five lenders have already repriced products higher this week, according to City AM's reporting, as swap rates, which underpin fixed mortgage pricing, have climbed in tandem with gilt yields. For brokers advising clients on remortgaging decisions, the message from markets is increasingly clear – the direction of travel is upward.

Susannah Streeter, chief investment strategist at Wealth Club, said Friday's stronger-than-expected growth makes a rate hike before Christmas somewhat more likely, though she noted the MPC would want to see further evidence that higher energy costs were feeding through to consumer prices before pulling the trigger. Three to four hikes over the next year remained a genuine possibility, she said, but only if the economy held up and consumers did not turn more cautious of their own accord – in which case, that reticence might "do some of the inflation-busting work for the bank."

Angeline Ong, senior technical analyst at broker IG, said the GDP surprise had handed "ammunition to BoE hawks pushing for a Q4 rate hike, even as gilt yields already sit at multi-decade highs on Middle East shipping attacks and firm US data."

What happens next?

The MPC is widely expected to hold Bank Rate at 3.75% when it meets on 17 September. Attention will focus on whether the vote split tightens further – at the most recent meeting in July, three MPC members voted for an immediate hike to 4%, and any widening of that minority could signal the committee is closer to acting than markets currently assume.

Markets are fully pricing in a hike by November, with a second increase expected by March 2027, according to LSEG data. Investors are also assessing the government's commitment to fiscal discipline ahead of the October budget.

Brent crude eased by more than 2.5% on Friday morning to below $105 a barrel, pulling back from the highs reached earlier in the week. But with Middle East tensions showing no sign of sustained resolution, analysts cautioned that energy price volatility was likely to remain a persistent upside risk to inflation – and to rate expectations – in the months ahead.