Pound Sterling Today: Stronger UK Growth Lifts Bank Of England Rate Outlook

UK GDP: Pound Rises as Growth Beat Backs November BoE Hike Call

The British Pound rose against the US Dollar after UK GDP beat forecasts, as Pantheon said stronger growth reinforced its case for a November BoE rate rise.

Britain’s economy is on course for a much stronger third quarter than the Bank of England expected, according to Pantheon Macroeconomics and Lloyds, giving Sterling fresh support after August output unexpectedly expanded.

Pantheon says the figures reinforce its forecast for a November 2026 interest-rate increase, with growth sufficiently strong to leave policymakers less concerned about tightening into a weak economy.

GBP/USD traded near $1.3264, up 0.25% from Wednesday’s close, while GBP/EUR was broadly unchanged at €1.1816.

The ONS reported monthly GDP growth of 0.1% in August, beating forecasts for a 0.1% contraction, although the expansion slowed from July’s 0.4% increase.

Lloyds sees enough strength already recorded to deliver another substantial quarterly gain: “More importantly, even if GDP is unchanged in September, output would still rise by around 0.7% q/q in Q3.”

That would exceed the Bank’s latest third-quarter growth projection of 0.4%, itself an upgrade from its earlier expectation of just 0.1%.

The quarterly calculation reflects the average level of output, so a flat September would still leave the economy substantially larger than in the previous three months.

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UK economists see less reason for the Bank of England to hold back

The stronger figures challenge the concern, examined in our earlier coverage of Sterling ahead of UK GDP, that economic fragility could undermine expectations for higher British interest rates.

Pantheon’s economists write: “The MPC currently faces no trade-off between high inflation and weak growth. The UK has grown much faster than rate-setters expected and is expanding well above any estimates of UK potential growth.”

“The evidence that Bank Rate at 3.75% is restrictive is increasingly thin on the ground.”

For Sterling, that assessment supports the prospect of higher returns on Pound-denominated assets.

Pantheon’s forecast extends to a second increase in February 2027: “So we expect the MPC to hike in November and February, with risks skewed to further hikes next year if energy prices fail to fall back soon.”

The Bank itself has not committed to that path, having left rates unchanged in September with three of its nine policymakers voting for an increase.

Nor does Pantheon treat every part of the growth picture as equally convincing.

Pantheon writes: “Our measure of underlying GDP-which strips out volatile sectors and one-offs-was unchanged month-to-month, down from a 0.6% rise in July. Growth in our underlying measure has averaged 2.8% annualised so far this year.”

On the estimated quarterly pace, the consultancy acknowledges: “As we say, that Q3 tracking seems too good to be true, given still-depressed business sentiment.”

“We cannot rule out downward revisions to the GDP data changing the picture in the coming months, but GDP only needs to fall by less than 0.3% month-to-month in September for quarterly growth to hit 0.7%.”

Manufacturing adds support as services pause

Lloyds points to a change in the source of August’s expansion: “While services have provided much of the impetus to growth in recent months, in August the industrial sector took the lead.”

“Industrial production rose by 0.8% m/m, driven by a strong 1.2% increase in manufacturing output, with nine of the thirteen manufacturing subsectors expanding.”

Services output was flat overall, but Pantheon sees encouraging momentum beneath the monthly fluctuations in administration, IT and professional services.

It suggests AI-related activity could be helping those industries, while stopping short of claiming a proven explanation.

The economists write: “It’s hard to be sure of the drivers, but these industries are among the most likely to be using AI tools or working in that area. Cloud computing is one example.”

Pantheon discounts the volatile mining improvement, but sees corroborating evidence of IT demand in wholesale trade:

“Wholesale trade will not repeat its 3.8% surge in August, but the rise looks like a correction for previous falls and was concentrated in IT equipment, which matches signs of strong purchases by other industries.”

Pantheon expects less disruption from Budget uncertainty than last year, helped by the relatively early timing of the forthcoming statement and the Chancellor’s aim for an uneventful Budget.

Pantheon warns: “The main short-term risks remain another hit to growth from uncertainty surrounding the October Budget and higher energy costs increasingly dragging on consumers.”

Barclays also sees the stronger growth picture as positive for the Budget and Sterling, all else equal.

The bank says: “Consumption (supported by consumers saving less relative to 2025) and investment (potentially helped by AI spending) have been the main drivers of growth.”

However, Barclays highlights a counterweight to the stronger data: Bank of England chief economist Huw Pill pushed back on Wednesday against market pricing for four quarter-point rate increases.

His caution about the scale of tightening does not necessarily rule out a November increase, but challenges expectations for a prolonged series of rises.

UK GDP and Pound Sterling FAQs

Did UK growth beat expectations?

Yes. GDP rose 0.1% in August, compared with forecasts for a 0.1% contraction.

Has third-quarter growth of 0.7% been confirmed?

No. It is a tracking estimate, with September’s figures and future revisions still able to change the result.

Does Pantheon expect a November rate rise?

Yes. It expects increases in November 2026 and February 2027, although the Bank of England has not committed to that path.