Interest rates predicted to rise four times by July
02:29pm
UK interest rates could stay on hold despite rises in Europe and US
The Bank of England could keep interest rates on hold even as the European Central Bank and US Federal Reserve raise rates, economists said.
Paul Dales of Capital Economic said central banks tend to raise and cut rates together as they respond to the same global issues.
However, he said there were three reasons why the UK is different from the eurozone in particular, where rates have risen twice this year.
He said rates in the UK were already restraining activity more than in Europe, and said financial conditions had already been tightened by markets without the need to raise the Bank Rate.
He added the UK’s jobs market is weaker than Europe’s, meaning there is “a smaller risk in the UK of the rise in energy inflation seeping into higher wage growth”.
He said: “None of this means that the Bank won’t raise rates at all. That’s unlikely at next Thursday’s policy meeting.
“Either way, the market view that the Bank will raise rates by more than the Fed from here and by as much as the ECB seems odd to us.”
02:00pm
More rate setters expected to back rate rise
Deutsche Bank expects more rate setters at the Bank of England to vote in favour of raising interest rates over the pressure from high energy prices.
Economists Sanjay Raja and Maui Brennan expect the Monetary Policy Committee to be divided but ultimately vote 6-3 in favour of keeping rates at 3.75pc.
The ICAEW has also bet on a 6-3 vote, along with Rabobank and ING.
Chief economist Huw Pill is expected to back a rate rise for a third straight meeting, and to be joined by Megan Greene and Catherine Mann to opt for a rate hike to 4pc.
Mr Raja and Mr Brennan said: “We do think the tides are turning on the inflation backdrop. Higher energy prices are here to stay for longer than expected.
“The economy has been far more resilient than the Bank of England envisaged. The labour market is showing some signs of stabilisation.
“And risks around wage settlements remain skewed to the upside. Put simply, we think the Monetary Policy Committee’s patience may be running thin. And the case for staying on hold is weakening slowly.”
They added: “Some nervousness across the MPC will likely come through in the minutes. And we expect many in the hold camp to become hyper-focussed on forthcoming wage settlement data with the bar for rate hikes slowly falling.”
01:38pm
US expected to raise interest rates over persistent inflation
Traders are bracing for the Federal Reserve to raise interest rates next week after the latest US inflation figures.
US consumer prices hit 3.4pc in August, according to the Labor Department, which was unchanged from July and in line with analyst expectations.
However, monthly inflation figures were higher than expected, with inflation rising 0.4pc in August, up from 0.1pc in July.
Money markets showed there was a 90pc chance that the Fed will raise rates at their meeting next week, up from 71pc before the figures were released.
01:21pm
Wall Street poised to rally ahead of US inflation figures
US stock indexes were on track to open higher ahead of key inflation figures which could help set the tone for whether the US Federal Reserve raises interest rates next week.
The Dow Jones Industrial Average was up 0.6pc in premarket trading ahead of the US consumer prices index, which could shift rate expectations.
The S&P 500 was up 0.5pc and the Nasdaq 100 climbed 0.6pc ahead of the opening bell as oil prices remained around $105 a barrel, down from the peak of $108 last week but still on track for its steepest weekly rise since July.
Said Haidar, founder of Haidar Capital Management, said: “We believe that the Federal Reserve needs to respond to these in the near term or risk a repeat of the high inflation of the 1970s, which would represent yet another failure of discretionary monetary policy.”
Oracle jumped nearly 7pc premarket after topping estimates for quarterly results on Thursday, which reassured shareholders that its AI investments were generating returns. Nvidia rose 0.8pc.
01:09pm
Interest rates ‘hostage to the Middle East’
Interest rates have become “increasingly hostage to events in the Middle East”, an economist said following the recent spike in oil prices.
Suren Thiru of the ICAEW said he expects the Bank of England to keep rates at 3.75pc next week but to talk up the prospect of higher borrowing costs in bid to contain inflation.
He said: “The outlook for interest rates is increasingly hostage to events in the Middle East.
“While rates could still remain on hold for the rest of the year, the longer US-Iran hostilities persist the greater the risk that policymakers feel compelled to tighten policy.
“With financial markets still volatile, committee members may also prefer to assess the impact of next month’s Budget on inflation and growth before deciding their next move.”
12:54pm
Petrol prices hit new four-year high
Petrol prices have risen to a fresh four-year high after the latest escalation of the conflict in the Middle East.
A litre of unleaded costs an average of 168.46p across the country, the highest level since September 2022, according to RAC, following the 10pc jump in oil prices this week.
The motoring group expects diesel prices to reach a new high since the star of the Iran war within days. A litre typically cost 190.08p on Friday.
RAC senior policy officer Rod Dennis said: “With oil leaping another $6 overnight to nearly $108, wholesale fuel prices – especially for diesel – continue their upward march.”
Higher fuel prices risk driving up inflation, which in turn would increase pressure on the Bank of England to raise interest rates.
12:35pm
Oil stockpiles declining more rapidly, warns IEA
The latest report from the International Energy Agency keeps up the pressure on the Bank of England to raise interest rates.
The Paris-based body warned that the prolonged shutdown in the Strait of Hormuz is forcing countries to drain their remaining oil stockpiles at a faster pace.
The dwindling stockpiles will soon put more pressure on supply, which will put more pressure on prices.
Global oil reserves have shrunk by 2.8m barrels a day since the US and Israel attacked Iran on February 28, but that pace increased to 3.1m barrels a day in August.
In its monthly oil market report, the IEA warned that if conflict dragged on in the Middle East and Ukraine, motorists and businesses would have to slash their fuel consumption.
“With buffers shrinking and the global refining system stretched to the limit, the need for progress in resolving the conflict in the Middle East – and the Russia-Ukraine war, which is now in its fifth year – is greater than ever, to avoid further market tightening and demand destruction,” the report said.
The “protracted US-Iran diplomatic standoff”, and recent attacks in the Persian Gulf and Red Sea, prompted the IEA to cut its forecasts in this month’s report.
Crude oil supply will now average 100.7m barrels a day this year, a drop of more than 5pc from 2025. That is 1.3m barrels a day lower than the IEA’s previous forecast.
“A full recovery in supplies from Middle East producers [will be] deferred until 2027,” the IEA warned.
The IEA said supply shortfalls and soaring diesel prices would slash demand by 2.5m barrels a day this year. That slump is almost 40pc larger than the agency forecast last month. But the pace of decline will be slower in this half of the year than the sharp drop seen over the summer.
12:06pm
Bailey could ‘push back’ against bets on four rate rises
The Governor of the Bank of England could “push back” against market bets that interest rates will rise four times by July.
Chris Turner of ING said market pricing of rates rising to 4.75pc next year “looks extreme”.
Traders have ramped up bets after a surge in oil and gas prices, with official figures on Friday suggesting the economy would be able to withstand higher borrowing costs.
However, policymakers are still projected to keep interest rates on hold at 3.75pc at their next meeting.
Money markets suggest there is around a one-in-four chance that rates are lifted to 4pc by the Monetary Policy Committee next week.
In April, Mr Bailey suggested markets were “getting ahead of themselves” by backing rate rises, at which time the suggestion was for two increases in rates.
Mr Turner said: “There’s even a risk, though probably small, that Governor Bailey opts to push back against market pricing – which now looks extreme.”
11:53am
UK stocks face worst decline in four months
UK-focused stocks were poised for their sharpest weekly decline in four months after the recent surge in oil prices.
The FTSE 250, which is geared towards the British economy, has come under pressure from rising energy prices.
However, it was up 0.5pc on Friday, with the flagship FTSE 100 up 0.6pc, after reports of a push for a deal to manage shipping through the Strait of Hormuz.
Brent crude, the international benchmark, has declined 3.5pc to less than $104 a barrel after the Financial Times reported that Gulf foreign ministers could meet their Iranian counterparts to discuss temporary shipping arrangements in the waterway.
Despite the news, the FTSE 100 was still on track for its worst week since early July.
Stocks were also boosted by official figures showing the UK economy grew 0.4pc in July, having been expected to flatline.
11:20am
Pound flat despite economic growth
The value of the pound was little changed despite Britain’s unexpectedly strong growth.
Sterling was flat against the dollar at just over $1.35 as markets brace for US inflation figures later today.
Traders have increased bets on higher interest rates around the world after the latest jump in oil prices.
Brent crude is on track for its biggest weekly rise since July, up 10pc, after Iran-backed Houthis seized control of Yemen’s port city of Mocha, risking disruption to shipping through the Red Sea.
Francesco Pesole, an analyst at ING, said: “Developments in the Gulf leave the balance of risks skewed towards higher oil prices, while stress in bond markets is increasingly bleeding into risk assets.”
US inflation figures later are one of the last major data points before the Federal Reserve meets next week to set interest rates.
The data are expected to show that prices accelerated in August as the cost of gasoline rebounded. US diesel prices have just hit a record high of $6 a gallon.
The pound edged up 0.1pc against the euro, which is worth 85.8p.
10:57am
UK faces slowdown as fuel prices pressure households
Yael Selfin, chief economist for KPMG, said: “Despite strong activity in July, the headline growth figure masks a weaker picture for households.”
She pointed to the consumer-facing services, like retail and hospitality, which marked falls in July following an earlier summer boost.
“Higher energy and fuel prices are likely to place further pressure on household budgets, while elevated mortgage rates will continue to weigh on housing activity and wider consumer spending,” she said.
“We expect momentum to slow in August and September, as higher energy and borrowing costs act as a headwind against growth.”
10:39am
UK growth ‘overstated’
The latest official figures are “overstating” the true pace of growth in Britain, an economist has warned after the unexpected jump in UK GDP.
James Smith, an economist at Dutch bank ING, said the economy has performed much better than expected amid the fallout of the Iran war.
However, he said: “We still think the GDP figures are overstating the true pace of economic growth.
“Roughly half of June’s rise in output was down to IT, a sector that makes up just 7pc of total economic activity.
“This is a recurring theme: on an annual basis, the sector makes up a third of the UK’s 1.5pc year-on-year growth rate.
“Though it’s not totally clear what’s driving this, we suspect AI is playing a role. Capex data for ‘other buildings’ has been solid through this year, and we suspect that’s a euphemism for data centres.
“That aside, it’s worth remembering that the UK’s GDP figures have a well-worn trend of performing better in the first half of the year than the second.
“That’s been the case ever since 2022, and we think that’s down to challenges with seasonally adjusting the data in a high inflation period.”
10:13am
UK growth ‘taken with a pinch of salt’
Britain should be wary of the latest jump in growth, Telegraph readers have suggested.
Many pointed out that growth per head has recently been much lower than the overall figures for the economy.
Here is a selection of views from the comments section below and you can join the debate below.
09:50am
Mortgage rates hit five-month high
Mortgage rates hit their highest level in five months after the latest spike in oil prices increased bets on the Bank of England raising interest rates.
The average two-year fixed residential mortgage rate reached 5.67pc on Friday, its highest since June, while the typical five-year deal hit its steepest rate since April at 5.72pc, according to Moneyfacts.
The move is being driven by expectations that the Bank of England will raise interest rates in the face of higher oil prices and resilient UK growth. The European Central Bank raised interest rates on Thursday.
Adam French, the groups’s head of consumer finance, said: “Rising mortgage rates are causing alarm for many of the nation’s borrowers again this week, with around 20 lenders making hikes.
“Some of the biggest high-street names, including HSBC, Halifax, Lloyds, Nationwide and Santander, have all repriced higher.
“The concern now is that wholesale funding costs have risen sharply again after the European Central Bank increased its bank rate which has shortened the odds on other central banks such as the Bank of England doing the same soon.”
09:34am
AI delivering for UK, says ex-Truss adviser
A former economic adviser to Liz Truss said the latest jump in growth was proof that AI is delivering for the economy.
Matthew Sinclair, who is now a senior director at tech lobbying group CCIA UK, said: “These growth numbers are the latest clear sign that AI and the wider digital economy are already delivering for the UK.
“If the Government can get some important calls right, particularly on regulatory reform to remove barriers to innovation, the UK can build on its established strengths and seize the opportunities of a fast-growing global tech sector to drive sustained economic growth.”
09:19am
Interest rates predicted to rise four times in next year
The Bank of England will be forced to raise interest rates by a whole percentage point over the course of the next year in the face of soaring energy prices and a resilient economy, money markets show.
Traders are betting that policymakers will push up rates from 3.75pc today to 4.75pc by July next year after official figures showed Britain’s economy grew by 0.4pc in July.
Betting on higher rates soared on Thursday after the price of oil surged to $108 a barrel as Houthi rebels took control of a key port in the Red Sea, risking further disruption to shipping.
It sent the cost of long-term borrowing for the government to its highest level since 1998 over fears that inflation will be kept higher for longer as a result of the conflict in the Middle East.
Andrew Wishart, senior UK economist at Berenberg, said the unexpected 0.4pc economic growth in July suggests interest rates are “not as restrictive” as some policymakers thought.
He said: “Evidence that the economy could cope with a solitary quarter point interest rate hike adds to the risk that the Bank of England will deliver one in November or December.”
08:59am
Unexpected growth ‘may be calm before next storm’
Higher oil prices and turmoil in bond markets is already blowing away the boost to Britain’s economy delivered by the hot summer, an economist has warned.
Julian Jessop of the Institute of Economic Affairs said: “The UK economy was still holding up better than most had expected in July, but this may just be the calm before the next storm.
“The recent strength in services partly reflects some tailwinds that are already fading, including the initial boost to consumer spending from the hot weather.
“The persistent weakness of the construction sector confirms that the government has yet to ‘fix the foundations.’
“Other tailwinds may last longer, notably the surge in spending on AI-related goods and services. This goes some way towards explaining the recent improvements in some of the productivity data.
“Unfortunately, any good news from two months ago is now being blown away by the fresh headwinds coming from energy prices and the bond markets.
“The UK economy is still lurching from crisis to crisis. The surge in the cost of government borrowing will heap more pressure on the Chancellor, who is far more likely to respond by raising taxes further than by cutting spending.
“It is also hard to see how the Bank of England can continue to keep official interest rates on hold when inflation is set to rise further above target.”
08:46am
Labour should not be ‘high-fiving’ over economy
Labour should not be “high-fiving themselves” despite the economy growing by more than expected in July, the Tories have said.
Andrew Griffith, the shadow chancellor, pointed out that long-term government borrowing rates had recently reached their highest level in almost three decades.
Mr Griffith said: “Nobody in this Labour government should be high-fiving themselves. Our construction and production sectors are shrinking, unemployment is up under Labour, and we’ve got the highest government borrowing rates in almost 30 years.
“Only the Conservatives have a plan to back the innovators and job creators with lower and simpler taxes, cheaper energy, and by cutting the red tape that is holding Britain back.”
08:31am
Borrowing costs near 19-year highs after stronger-than-expected growth
The cost of government borrowing edged lower on Friday after Britain’s economy grew unexpectedly.
The yield on 10-year gilts, a benchmark, for what the Treasury pays to borrow money, fell from 5.37pc to 5.35pc, although still close to its highest level since 2007.
The 30-year gilt yield fell from 5.93pc to 5.91pc as oil prices remain around $106 a barrel. High borrowing costs threaten to wipe out much of the Chancellor’s Budget headroom.
08:18am
Healey says economy showing ‘welcome resilience’
The Chancellor warned of the uncertainty created by the Iran war as he hailed Britain’s “still fragile” growth.
John Healey said: “Britain’s economy is demonstrating a welcome resilience, despite serious global uncertainty. Our growth although still fragile was the fastest in the G7 in the first half of the year.
“But, the conflict in the Middle East does have impacts here at home – from the cost of the weekly family shop to the cost of government borrowing.
“We are shifting power to local communities to generate growth in more places and backing business to succeed with more investment, innovation and jobs. This is the route to raising living standards and delivering good growth in every postcode”.
08:15am
Summer growth will be four times higher than previously expected
The UK economy is on track to grow four times faster than previously expected this summer after beating expectations for July.
Sanjay Raja, chief UK economist at Deutsche Bank, said: “Summer GDP growth now looks poised to be four times larger than we thought.”
Previously, Deutsche Bank had expected the UK economy to grow by just 0.1pc between July and September. Now, it is on track to expand by 0.4pc, Mr Raja said.
He added: “Annual GDP growth expectations will also lift meaningfully on the back of this, with today’s data likely to add at least a tenth to expectations.”
The latest figures show that the UK is finally starting to record productivity growth, Mr Raja said.
“If you believe the administrative HRMC jobs data, the UK is churning out growth with fewer employees over the last year and a bit. Put differently, productivity growth is finally starting to come through.”
08:07am
UK stocks mixed despite unexpected growth
The London stock market lacked direction in the face of higher oil prices, even after the economy grew unexpectedly in July.
The UK’s flagship stock index rose 0.1pc to 10,619.17 while the domestically focused FTSE 250 sank by 0.9pc to 23,897.68.
It came as oil prices remained near $106 a barrel over fears shipping through the Red Sea will be disrupted by Iran-backed Houthis taking control of a key port.
08:03am
Growth story ‘becoming hard to ignore’
Britain’s economy may be benefitting from the massive investments in AI, economists have said, as households continue to spend despite the shock from the Iran war
Sanjay Raja, chief UK economist at Deutsche Bank, said there were signs that heavy spending by AI hyperscalers was “coming through” into the dominant services sector of the economy.
Telecoms grew 1.1pc in July, with computer programming up 3.5pc and information services up 1.1pc.
Mr Raja said: “The UK growth story is becoming harder to ignore. Annualised growth is now tracking at 2.4pc.
“Households and businesses are still spending – despite the unfolding energy shock impacting disposable incomes.
“There’s clearly something happening here. And it’s not just headline GDP. If you believe the administrative HRMC jobs data, the UK is churning out growth with fewer employees over the last year and a bit.
“Put differently, productivity growth is finally starting to come through.”
07:51am
Housing slump hits construction
Construction activity dropped by 0.5pc in the three months to July as house building slumped.
New work in public housing plummeted by 8.4pc in three months as costs weighed on builders.
In July alone, monthly construction output grew by 0.1pc, however this came solely from an increase in repair and maintenance. Both private and public housebuilding plunged.
The ONS said there were signs of even weaker housing activity in August. The number of new Energy Performance Certificates registered for new dwellings well year-on-year while listings on Rightmove declined.
07:49am
Rate rise ‘unlikely’ despite growth
The Bank of England is unlikely to raise interest rates at its next meeting despite the unexpected growth in Britain’s economy during July, an economist said.
Traders are giving around a 24pc chance of a rate rise later this month, up from 21pc on Thursday.
Suren Thiru of ICAEW said: “July’s strong showing is likely to mark the high-water mark for growth in the third quarter, with higher energy bills and pre-Budget tax uncertainty expected to weigh on household spending and economic activity through August and September.
“If the UK economy does start to falter, the Chancellor could be left with a Budget headache, as more muted growth and surging borrowing costs erode his fiscal headroom, raising the prospect of further tax rises.
“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.”
07:34am
Computers drive manufacturing growth
Manufacturing output rose by 0.9pc, driven by a surge in computers and electronics, official figures show.
The manufacture of computer, electronic and optical products soared by 5.2pc in July.
The second largest contribution to manufacturing growth came from pharmaceutical products, which jumped by 3.4pc after a fall of 5.1pc in June.
The information and communication sector grew by 2.4pc in July, making it the second largest contributor to services sector output.
This was primarily driven by 3.5pc growth in computer programming, consultancy and related activities, which the ONS said contributed 0.12 percentage points to real GDP in July.
07:32am
Oil prices risk derailing growth
The surge in the price of oil risks derailing the momentum in Britain’s economy going into the third quarter of the year, an economist has warned.
Brent crude touched $108 a barrel on Thursday after Iran-backed Houthis took control of a key port near the entrance to the Red Sea.
Martin Beck, chief economist at WPI Strategy, said Britain’s economy had “retained more momentum than many had feared” after the 0.4pc expansion in July.
He said: “The question now is whether this strength can be sustained as the economy faces a more difficult backdrop.
“The renewed rise in oil prices to above $100 a barrel is a significant headwind. If sustained, higher energy costs will lift inflation, squeeze household spending power and make the Bank of England’s job more difficult.
“Higher global interest-rate expectations have also pushed up longer-term borrowing costs, feeding through into mortgage rates and the government’s debt-interest bill.
“There is also the risk that uncertainty ahead of the autumn Budget weighs on business and consumer confidence. Stronger growth in areas such as AI and cloud investment shows that firms are willing to spend where they see opportunities.
“The priority for government should be to reinforce that momentum rather than undermine it through higher taxes on investment or prolonged policy uncertainty.”
07:26am
Artificial intelligence driving growth
The global artificial intelligence boom is driving UK growth, as GDP rose unexpectedly by 0.4pc in July.
The Office for National Statistics (ONS) said that computer programming was a key driver behind the growth recorded over the last three months and there are clear signs that this is tied to AI.
ONS director of economics statistics Liz McKeown said: “Growth remained relatively robust in the latest three months, as ongoing strength in the services sector was only partially offset by falls in both production and construction.
“Within services, computer programming was the largest contributor, continuing the strong growth seen throughout the year, with evidence that businesses involved with AI and related technologies helped to boost this sector.
“Continuing recent trends, research and development and rental and leasing also helped drive growth, while wholesaling saw a notable fall.
“Looking at the latest month, services also drove growth in July, with computer programming again making the largest contribution.”
07:14am
World Cup and heatwave boost growth
The World Cup and hot weather delivered a boost to the economy during July, the ONS said.
Officials said businesses reported an increase in turnover linked to the football tournament, which ended on July 19, the day before Andy Burnham became Prime Minister.
This helped boost alcohol production, wholesale, pubs and clubs, and advertising but was a negative for restaurants.
Many firms also said the weather also had a positive impact during the second hottest July on record.
07:07am
Good morning
Thanks for joining me. Britain’s economy grew unexpectedly in July, handing Chancellor John Healey some breathing space ahead of the Budget.
The UK’s gross domestic product (GDP) expanded by 0.4pc during the month, according to the Office for National Statistics (ONS). Analysts had expected the UK economy to flatline.
Officials said pubs and clubs, advertisers and alcohol makers reported an increase in turnover linked to the World Cup, while many firms also said the second hottest July on record had a positive impact.
The data showed Britain’s economy may be benefitting from the massive investments in AI, with activity in telecoms expanding by 1.1pc in July, computer programming up 3.5pc and information services up 1.1pc.
The data will lend support to the “optimistic story” that John Healey tried to tell about the economy in a major speech this week.
Growth also accelerated from 0.3pc in June after Andy Burnham took over as Prime Minister in July.
It slightly eases pressure on the Chancellor after the cost of government borrowing costs rose to levels not seen in decades after a jump in the price of oil reignited a bond market sell-off.
The Treasury’s 10-year interest rate rose above 5.3pc on Thursday, a level not seen since 2007. It threatens to wipe around £10bn from Mr Healey’s fiscal headroom before his first Budget next month, according to economists at the Item Club. Here is what you need to know.
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What happened overnight
Oil prices remained at their highest level since May as tensions flared in the Middle East.
Brent crude was above $105 a barrel after after Iran-backed Houthis seized control of Yemen’s keyport of Mocha, threatening Saudi oil exports in the Red Sea.
Asian shares declined, tracking Wall Street losses. Japan’s Nikkei 225 dropped 2.8pc to 63,442.30, while South Korea’s Kospi lost 2.3pc to 6,872.39.
Hong Kong’s Hang Seng dipped 0.8pc to 24,753.54. The Shanghai Composite index was down 1.8pc to 3,862.73.
Australia’s S&P/ASX 200 fell 1.2pc to 8,712.20.
Taiwan’s Taiex lost 1.7pc, while India’s Sensex declined 1pc.
On Thursday, Wall Street’s benchmark S&P 500 dropped 0.6pc in its fourth straight loss. The Dow Jones Industrial Average lost 0.6pc, and the technology-heavy Nasdaq composite fell 0.7pc.