Leadership1 publisher3 min readPublished
Money markets added a fourth UK rate rise before July's GDP surprise arrived
The Office for National Statistics put July growth at 0.4% against forecasts of none, and money markets now price Bank rate at 4.75% by July 2027. Oil and the European Central Bank did most of that work.
The Board Room · Leadership desk
What happened
- The Office for National Statistics reported that the UK economy grew 0.4% in July 2026, against City forecasts of zero growth, following 0.3% growth in June.
- Money markets now price four quarter-point rises by July 2027, taking Bank rate to 4.75% from 3.75%, with the first of them priced for November.
- KPMG's chief economist said consumer-facing services contracted during the same month as retail and hospitality activity fell back.
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Why it matters
- cost At the priced terminal rate, 100 basis points costs about £1m a year for every £100m of floating-rate debt, and the one rise added to the curve this week accounts for £250,000 of it.
- exposure A UK borrower's 2027 hedge price now moves on Gulf shipping news and Frankfurt decisions; the domestic data release was the smaller input this week.
- constraint Retail and hospitality operators will fund next year's capex at a rate justified by growth in scientific research and software consultancy, which is not their demand.
- decision Higher borrowing costs land on the chancellor's 28 October budget, where economists say tax rises or spending cuts may follow, so a 2027 plan has to absorb a rate change and a fiscal one.
Four quarter-point rises is 100 basis points, which takes Bank rate from 3.75% to 4.75% [5][10]. That is the rate a 2027 plan has to be built against if the curve is right. It is also a price, not a forecast: it is what a hedge costs this week, and the Bank has not voted on any of it.
The order of events matters to anyone reading the July figure as the cause. At the start of this week money markets were pricing three quarter-point rises by July 2027 [6]. This week's surge in the oil price drove bond yields higher and investors raised their expectations for UK rate rises [8]. They jumped again when the European Central Bank raised eurozone interest rates to 2.5% and warned that the risk of higher inflation over the next year has risen [7]. According to the Guardian, the fallout from the war in Iran had already meant higher interest rates than were expected at the start of the year [29].
Angeline Ong, senior technical analyst at the brokerage IG, said: "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." [9]
The hawks are not expected to win next week. Economists cited by the Guardian said higher oil prices and stronger-than-expected growth are unlikely to prompt the Bank's policymakers to raise rates at that meeting [13]. Suren Thiru, chief economist at the ICAEW, said: "While these figures may strengthen the hawkish mood among rate-setters, a September rate rise still looks unlikely as most policymakers remain hopeful that a sluggish economy will ultimately help bring inflation under control, despite escalating US-Iran tensions." [14] The first rise the market has actually dated is November [5].
Composition is where the July number gets awkward. Services grew in 11 of its 14 subsectors, with information and communication up 2.5% and computer programming, consultancy and related activities up 4.4% [15]. Manufacturing rose 0.9% [24]. The ONS said "many of the businesses reporting the largest turnover in July 2026 are involved in activities related to artificial intelligence and cloud computing" [16]. Martin Beck, chief economist at WPI Strategy, said: "At a time when many traditional parts of the economy remain subdued, this is exactly the kind of productivity-enhancing spending the UK needs more of." [17]
Yael Selfin, chief economist at KPMG, said consumer-facing services contracted in July as retail and hospitality activity fell, and that "elevated mortgage rates will continue to weigh on housing activity and wider consumer spending" [18].
The trend, on the measure the ONS prefers, has not changed. Growth over the three months to July was 0.4%, the same pace as the three months to June, and the ONS says the three-month figure is more representative [19]. The UK was the fastest-growing economy in the G7 over the first half of the year [23]. Andrew Hunter, senior economist at Moody's Analytics, pointed to "the repeated pattern in recent years of strong growth in the first half of the year being followed by a sharp slowdown in the second", and said Moody's continues to forecast more modest growth over the rest of 2026 [20].
What to watch
- August GDP: a second month of contraction in retail and hospitality would separate the AI-related services growth from the rest of the economy.
- Gilt yields, which Ong ties to Middle East shipping attacks and US data, and whether they hold at multi-decade highs if oil retreats from above $100.
- Whether the money markets hold four rises for July 2027 through the budget, or slip back to the three priced at the start of this week.