Money markets are now pricing in four Bank of England rate hikes over the next 12 months after GDP data showed the UK economy grew by 0.4 per cent in July, defying expectations that growth would stall. The figures have strengthened the hand of hawkish members of the Monetary Policy Committee (MPC) who are already pushing for an increase before the end of the year.
Andrew Bailey is widely tipped to oversee a rate rise in November, though the MPC is expected to leave the Bank Rate unchanged when it meets next week. If markets are proved right and four quarter-point increases follow, the Bank Rate would move from its current level of 3.75 per cent to 4.75 per cent within less than a year.
A divided MPC on Bank of England rate hikes
The committee’s internal tensions are already on record. At its meeting ending on 20 September 2023, the Bank of England published minutes showing the MPC voted by a majority of 5 to 4 to hold Bank Rate at 5.25 per cent. The four dissenting members each preferred to raise the rate by a further 0.25 percentage points, to 5.5 per cent. That near-even split underscores how fine the judgement call has become, and why Friday’s GDP surprise carries weight inside the committee.
Separately, the MPC voted unanimously to reduce the stock of UK government bond purchases held for monetary policy purposes by £100 billion over the 12-month period from October 2023 to September 2024, a further sign that the committee is in a tightening frame of mind even where it has not yet moved on rates.
GDP figures hand ammunition to the hawks
Economists had expected any summer spending boost from heatwaves and the World Cup to have faded by July. The stronger-than-expected number upended that view and shifted the debate within the MPC toward those favouring action.
Susannah Streeter, chief investment strategist at Wealth Club, said the GDP figures make a rate rise before Christmas ‘a touch more likely.’ She added: ‘The big worry is that higher energy costs will be passed on as higher prices by businesses and consumers, but it’s likely that the committee will want to see more evidence of that before triggering rate hikes. Given the turmoil in energy and bond markets, however, there is an expectation that we could see three to even four rate hikes over the next year. However, if the economy slows and consumers turn more cautious, that reticence may do some of the inflation-busting work for the bank.’
Andrew Wishard, an economist at Berenberg, said: ‘Evidence that the economy could cope with a solitary 25bp interest rate hike adds to the risk that the BoE will deliver one in November or December. However, as the central bank struggles to trust the official GDP data, broader evidence of solid growth would need to follow this strong outturn to convince it.’
Angeline Ong, senior tech analyst at broker IG, said the surprise growth hands more material to the MPC’s hawkish members, naming Huw Pill and Catherine Mann as among those pushing for a hike. ‘The upside surprise hands 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,’ she said.
Gilt yields and oil prices in focus
UK borrowing costs eased on Friday morning after reaching 19-year highs the previous day. The yield on 10-year gilts fell two basis points to 5.351 per cent. Oil prices had surged earlier in the week, though Brent crude dropped back by more than 2.5 per cent on Friday morning to below $105 per barrel.
The next MPC meeting will be watched closely for any shift in tone, particularly given that four of nine members were already prepared to vote for a rise at the September sitting. With July’s GDP data now on the table, the case for holding may be harder to sustain come November.
