"The UK’s strong economic growth in the second quarter has all but ended any hope of another rate cut next month."
- Derrick Dunne, CEO of YOU Asset Management
UK GDP grew by 0.6% in the three months to June, following growth of 0.7% in Q1, with widespread growth in the services sector driving growth.
On a monthly basis, GDP saw no growth in June, in line with economists' expectations, following growth of 0.4% in May.
With strong quarterly growth continuing, alongside elevated inflation, many industry experts predict that the Bank of England will take a more cautious approach to reducing interest rates.
Derrick Dunne, CEO of YOU Asset Management, commented: “The UK’s strong economic growth in the second quarter has all but ended any hope of another rate cut next month.
“Growth of 0.6% in Q2 puts the UK near the top of the growth table among G7 nations, reducing the urgency for a reduction in borrowing costs.
“The main reason for cutting rates in the first place was to boost flagging growth, but the economy seems to be doing just fine without central bank stimulus – for now, at least.
“That doesn’t mean we’ve seen the end of the current easing cycle. There will be further rate cuts once the Bank of England is satisfied that wage growth has eased enough and inflation begins to fall again.
“Given that, it looks increasingly likely that we won’t see another move from the Bank of England until the rate-setting Monetary Policy Committee’s meeting in November."
Alice Haine, personal finance analyst at Bestinvest by Evelyn Partners, said: "The mixed GDP data highlights the conundrum the BoE faces as it mulls when to make the next rate cut. This week’s data dump from the Office for National Statistics has seen inflation in the 12 months to July edge up to 2.2% though, comfortingly, stubbornly high services inflation and Core CPI - metrics the BoE tracks carefully - both eased back.
“Separately, unemployment dropped back unexpectedly in the three months to June to 4.2% while wage growth slowed. Probably the most worrying statistic this week, however, has been the 22.2% inactivity rate, as this indicates that a fifth of working age adults are either not bothering to look for work – perhaps to retire early - or are too sick to do so. Worker shortages can prevent an economy from achieving its full potential and prove inflationary as employers are forced to offer higher wage packets to attract the talent they want.
“With so many variables to consider, the BoE may stick to a cautious path, which could see households having to wait until November, rather than September, for the next rate cut. While the BoE has indicated it is prepared to cut borrowing costs again, it has also made it clear it will evaluate domestic price pressures carefully before it moves ahead with another rate reduction."
However, George Lagarias, chief economist at Mazars, believes that “British aggregate economic activity is just strong enough to inspire confidence but not robust enough to deter the central bank from future rate cuts".
