UK Economy Sees Growth in May, GBP Hits Four-Month High

The British pound rose to its highest level in four months. This could lower the chances of an interest rate cut in August.

Key Takeaways

• The UK economy rose by 0.4%, more than the expected 0.2%, affecting the GBP's value and financial policy.
 

• Better-than-expected economic growth also makes the probability of the BoE cutting interest rates, estimated at 50/50, less likely.
 

• After a recession last year, the UK economy is expected to beat the BoE’s Q2 growth forecast of 0.5% if things remain the same.

The British pound rose to its highest level in four months. Figures revealed that the UK economy grew faster than expected in May, which could lower the chances of an interest rate cut in August.  

The UK’s gross domestic product grew by 0.4% in May, compared to only 0.2% growth as estimated by economists. This growth allowed the pound to rise by as much as 0.16% to $1.2865, its highest point since March 8. The pound also strengthened against the euro, as the latter fell by approximately 0.1% to a one-month low of 84.21 pence. Susannah Streeter, the head of money and markets at Hargreaves Lansdown, said:  

"This snapshot of an economy growing a bit faster than forecast, could make Bank of England policymakers that bit more reticent about voting for an interest rate cut on 1 August."

The stronger-than-expected GDP data also came amid a speech by BoE chief economist Huw Pill on Wednesday, which led markets to push back expectations for policy easing. Pill noted that services inflation and wage growth remained “uncomfortably high” while headline inflation fell to the BoE’s 2% target in May. Pill, who is seen as a centrist on the MPC, made these remarks in his first public utterances over six weeks as the BoE was in a silent period in May ahead of last week’s parliamentary elections.

The general trend of the global currencies will probably depend on the U.S. inflation figures due at 12:30 GMT, which will either confirm or negate the current market view that the Federal Reserve may tilt towards a rate cut in September.

The Path Forward is Getting Brighter for the UK Economy

Overall, the UK economy is improving from the previous year, which was characterised by a slight recession. If there is no downturn in June, growth is expected to exceed the Bank of England’s forecast of 0.5% for the second quarter.  

The month of April was stagnant due to adverse weather conditions, but the second quarter is expected to finish excellently compared to the first quarter. Consumer spending, possibly due to the Euros football tournament and Taylor Swift’s Eras Tour in the UK, may also lift June’s numbers.

Overall, the warmest May on record provided a boost to economic growth, exceeding expectations in terms of the UK’s GDP growth and supporting consumer-facing sectors such as retail and construction activities.