Traders now expect the Bank of England to raise borrowing costs four times by 2027 after a surprise growth reading collided with a Middle East-driven oil price spike.
London markets (LSE: UKX) were recalibrating interest-rate expectations on Friday after data showed the UK economy grew 0.4% in July, far stronger than economists had pencilled in, prompting money markets to price in as much as a full percentage point of Bank of England rate rises over the next 18 months.
Pricing in the swaps market now implies the Bank Rate climbing from its current 3.75% to around 4.75% by July 2027, four quarter-point hikes, a sharp reversal from earlier expectations of stable or falling rates, as investors reassess the outlook amid a fresh energy price shock.
The shift has been amplified by a surge in oil prices, with Brent crude recently touching around $108 a barrel after Houthi forces seized control of a key Red Sea port, stoking fears of renewed disruption to global shipping and energy supplies. Higher energy costs feed directly into transport and household bills and risk reigniting broader inflation through wages and pricing across the economy.
Long-dated UK government bond yields have also jumped, with borrowing costs hitting their highest levels since 1998, reflecting investor concern that the twin pressures of resilient growth and dearer energy could keep inflation elevated for longer than the Bank had anticipated. Andrew Wishart, senior UK economist at Berenberg, said the strong July GDP print suggests current interest rates may not be restraining activity as much as some policymakers assumed, raising the odds of a further quarter-point hike in November or December.
For small-cap investors, the recalibration matters: a steeper rate path would raise the cost of capital for indebted growth companies and could pressure valuations across AIM, even as it signals underlying economic resilience. Attention now turns to the Bank's next Monetary Policy Committee meeting and further inflation data, which will determine whether markets' bet on four rate rises proves justified or overdone.
This report is based on FTSE 100 Index’s announcement and coverage by Share Talk. Company announcements can be tracked via London Stock Exchange RNS and Investegate, and the full results calendar is worth watching for the next update.
This article is for general information only and does not constitute investment advice or a recommendation to buy or sell any security. Photo: Annie Spratt on Unsplash.
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