The Bank of England is expected to hike interest rates as many as four times within the next year, City figures have said, after the economy delivered surprise growth in July.
The central bank is expected to be buoyed by this morning’s GDP figures, which saw the UK economy grow by 0.4 per cent in July despite forecasts that growth would grind to a halt.
Andrew Bailey is widely tipped on to oversee an interest rate hike in November, economists have said, though his Monetary Policy Committee (MPC) is expected to leave rates unchanged when it meets next week.
Money markets are now pricing in four quarter-point hikes by July next year, which would see the Bank rate rise from 3.75 per cent today to 4.75 per cent in less than 12 months.
This morning’s stronger-than-expected growth makes an interest rate hike before Christmas “a touch more likely,” Wealth Club chief investment strategist Susannah Streeter said.
“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.”
GDP growth ‘ammo for hawks’
Economists had expected summer spending boosts caused by the heatwaves and the World Cup to recede in July. But Friday’s GDP figures are evidence that the UK economy could withstand a hike to rates this year, analysts have said.
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 that the economy’s surprise growth will hand more evidence to the MPC’s hawkish members – namely Huw Pill Catherin Mann – and as they push 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.
UK borrowing costs eased on Friday morning after reaching 19-year highs on Thursday. The yield on 10-year gilts fell two basis points to 5.351 per cent.
Oil prices surged earlier this week though Brent crude – the international benchmark for oil prices – dropped back by more than 2.5 per cent on Friday morning to below $105 per barrel.