Financial markets are now pricing in as much as one percentage point of Bank of England interest-rate increases over the next year, as stronger-than-expected UK economic growth and surging energy prices raise concerns about persistent inflation.
Money-market pricing suggests the Bank Rate could rise from 3.75% currently to around 4.75% by July 2027, equivalent to four quarter-point increases.
Expectations for tighter monetary policy strengthened after official figures showed the UK economy grew by 0.4% in July, beating expectations and suggesting economic activity remains more resilient than policymakers may have anticipated.
The stronger growth figures come as the Bank of England faces renewed inflationary pressure from sharply higher energy prices.
Oil prices have surged amid escalating tensions in the Middle East, with Brent crude recently reaching around $108 a barrel after Houthi forces took control of a strategically important Red Sea port, increasing fears of further disruption to global shipping and energy supplies.
The combination of stronger domestic growth and higher oil prices has prompted investors to reassess the likely path for UK borrowing costs.
Long-dated UK government bond yields have also risen sharply, with government borrowing costs reaching their highest levels since 1998, reflecting concerns that the latest energy shock could keep inflation higher for longer.
Higher energy prices feed directly into transport, manufacturing and household costs, while sustained increases can also generate wider inflationary pressure through wages and the price of goods and services.
Andrew Wishart, senior UK economist at Berenberg, said the unexpectedly strong July GDP figure suggests interest rates may not be restraining the economy as much as some Bank of England policymakers had assumed.
He said the economy’s apparent ability to absorb tighter financial conditions increases the possibility that the Bank could deliver another quarter-point rate increase in November or December.
With the UK economy proving more resilient while energy prices continue to climb, markets are increasingly betting that the Bank of England’s next move will be towards higher rather than lower interest rates, marking a significant shift in expectations for monetary policy over the coming year.
