London stocks closed higher on Friday after UK economic growth significantly exceeded expectations, although the stronger data also added to debate over the future direction of Bank of England interest rates.
The FTSE 100 closed 0.39% higher at 10,650.44, while the FTSE 250 gained 0.38% to 23,975.73.
Figures from the Office for National Statistics showed that the UK economy expanded by 0.4% month-on-month in July, accelerating from growth of 0.3% in June and comfortably beating expectations for no growth.
On an annual basis, the economy was 1.6% larger than in July last year.
The Confederation of British Industry said the stronger-than-expected performance suggested the economy had carried some of its momentum from the first half of the year into the third quarter.
However, CBI senior lead economist Ben Jones warned that the outlook for the second half remained more challenging, with higher household energy bills, volatile energy markets and rising global borrowing costs creating additional pressure.
Other UK economic indicators were also relatively resilient.
Services output, which accounts for the majority of the UK economy, increased 0.4% in July, matching June’s expansion.
Production output rose 0.2%, reversing a 0.2% decline in June, while construction output edged 0.1% higher following a 0.1% contraction the previous month.
The UK’s total goods and services trade deficit narrowed to £9 billion in the three months to July, an improvement of £1.1 billion compared with the three months to April.
The stronger GDP figures arrive at a particularly important time for monetary policy, with financial markets increasingly debating whether the Bank of England could be forced to raise rates as elevated energy prices threaten to keep inflation higher for longer.
Danske Bank maintained its base case that the Bank Rate will remain at 3.75% until the second quarter of 2027, when it expects the Bank to resume its easing cycle with a 25-basis-point reduction.
However, the bank acknowledged that if energy markets remain under pressure and the UK economy continues to demonstrate resilience, an interest-rate increase could become necessary even without evidence of broader inflationary spillovers.
That contrasts with increasingly hawkish market expectations, with traders recently pricing a significantly greater probability of higher UK interest rates as oil prices and government bond yields have climbed.
On the corporate front, Shell gained 0.31% after its Norske Shell business applied for exploration licences in Norway’s 2026 licensing round.
Shell is among 21 energy companies competing for exploration rights across 70 blocks on the Norwegian continental shelf, with successful applicants expected to be announced in early 2027.
Friday’s stronger UK economic data provided support for London equities, but it also reinforced the dilemma facing the Bank of England: economic growth is proving more resilient than expected just as the latest energy shock threatens to revive inflationary pressure.
