Key facts
- UK economy grew 0.4% in July, exceeding forecasts.
- AI-related sectors contributed to the July growth.
- Money markets expect up to four Bank of England interest rate hikes by July next year.
- The Bank of England's Monetary Policy Committee is expected to leave rates unchanged at its next meeting.
- The yield on 10-year gilts fell to 5.351%.
The UK economy showed unexpected resilience in July, growing by 0.4% and surpassing economists' forecasts of zero growth. This expansion was partly driven by services, particularly those related to artificial intelligence and cloud computing, and a 0.2% rise in industrial production. Despite this positive economic performance, money markets are now pricing in as many as four quarter-point interest rate hikes by the Bank of England by July next year, which would lift the Bank rate from 3.75% to 4.75%.
Economists had anticipated that summer spending boosts would recede in July, but the stronger-than-expected figures suggest the economy could withstand further rate increases. While the Bank of England's Monetary Policy Committee is expected to leave rates unchanged at its next meeting, the upside surprise hands ammunition to the committee's more hawkish members pushing for a rate hike later in the year. Borrowing costs eased on Friday morning after reaching 19-year highs on Thursday, with the yield on 10-year gilts falling two basis points to 5.351%.