UK GDP Hits 0.4% in July, Boosting Rate Hike Expectations

The UK economy grew by 0.4% in July. This figure exceeded forecasts that predicted zero growth. The data marks a recovery after a flat month in May. June saw a 0.3% expansion. The Office for National Statistics released these figures today.

Services drove the monthly increase with a 0.4% rise. Production added 0.2% to the total. Construction contributed a 0.1% gain. Manufacturing specifically grew by 0.9%. These sectors supported the broader economic output.

Strong data supports rate hike case

The Bank of England held rates at 3.75% in July. The Monetary Policy Committee was split 6-3. Three members voted for a hike. Stronger GDP data adds weight to their argument. Economist Andrew Wishard notes this suggests current rates are not restrictive enough.

Berenberg analysts see risk of a hike before Christmas. They believe the economy can absorb a 25 basis point increase. The central bank remains cautious about official data quality. More evidence of solid growth is needed to convince policymakers.

Markets price in four hikes by 2027

Investors expect four quarter-point hikes by July 2027. This would lift Bank rate to 4.75%. At the start of the week, markets priced in three hikes. Expectations rose after the European Central Bank hiked rates to 2.5%. Oil price surges also pushed bond yields higher.

Gilt yields sit at multi-decade highs. This reflects global energy and shipping tensions. The upside GDP surprise gives hawks more ammunition. One rate rise is now priced in by November. The path to 4.75% appears more likely than before.

Sector performance shows mixed results

Services subsectors showed broad growth. Eleven of fourteen subsectors expanded in July. Water supply and waste management grew by 2.0%. Mining and quarrying fell by 4.4%. Electricity and gas supply dropped by 1.5%. These shifts highlight uneven momentum across the economy.