UK GDP and BOE Question
· UK GDP rose 0.1% in May as expected, helped by services but with softness remaining in other areas. H2 will depend on businesses and consumers, where a BOE rate hike would dent sentiment and spending – we look for no change in policy rates in 2026 however, followed by 2027 cuts. Additionally, fiscal policy will be a swing factor. Though small net stimulus could be seen under the new PM Burnham, tax rises could be a restraint on consumers.
Figure 1: UK GDP Monthly (%)
Source: Datastream, CE
· The latest UK GDP data shows that UK GDP rose 0.1% in May as expected, helped by services but with softness remaining in other areas (construction fell 0.8% and remains volatile). H2 will depend on businesses and consumers. Fiscal policy will be a swing factor. The key event will be the announcement on a new Chancellor, with Andy Burnham set to take office on July 20. The betting odds favour Yvette Copper or Shabana Mahmood who would be seen as gilt market friendly and unlikely to relax the fiscal rules too much, while Ed Miliband would raise concerns over fiscal slippage (currently 3rd favourite). Though small net stimulus could be seen under the new PM Burnham, tax rises could be a restraint on consumers.
· This all feeds into the BOE thinking, with the July 30 monetary policy report and MPC minutes providing extra insight into the MPC thinking. Money market futures are still discounting that a 25bps hike will be delivered at the September meeting followed by a further 25bps to 4.25% in April 2027. BOE Bailey comments to the Treasury Select committee this week suggest that a hawkish bias will remain, but is unlikely to signal a September hike. Bailey noted that the 4 days of clashes between Iran and the U.S. mean that we could be left with an unstable process (in the Straits of Hormuz and for energy prices) for the foreseeable future. This argues to keep a hawkish tone. However, Bailey also noted that economic data pointed to limited impact on UK inflation and this argues against signalling a September hike. Financial markets will also be guided by the CPI and labour market data next week. We remain of the view that a soft economy will stop the BOE from hiking and that policy rates will be cut in 2027 (here).