UK GDP Surprise Puts BoE Rate Cut Timeline in Question; GBP/USD Reverses Earlier Losses

UK Economy Returns to Growth: Will the BoE Delay Further Rate Cuts?

Will June GDP recovery put Bank of England policy easing on ice? Here’s what the data, experts, and markets are saying.

The UK economy grew 0.4% month-on-month in June, recovering from May’s 0.1% contraction, and above a consensus of 0.1%.

On a quarterly basis, the economy expanded by 0.3% in Q2, down from 0.7% in Q1. However, annual growth accelerated from 0.7% in Q1 to 1.2% in Q2. Economists had expected quarterly and annual growth of 0.1% and 1%, respectively, in the second quarter.

According to the Office for National Statistics:

• Services sector output rose by 0.4% and construction by 1.2% quarter-on-quarter, the largest contributors to overall output growth.
• Production fell by 0.3% after a 1.3% increase in Q1. However, manufacturing production grew 0.3% after increasing 1.1% in the previous quarter.
• Household consumption increased 0.1% in Q2 2025, driven by rising spending on miscellaneous goods and services, transport, clothing and footwear, and housing.

Overall, the data signaled a pickup in economic momentum, with services, private consumption, and manufacturing providing upward momentum.

Experts Highlight Inflation Risks: Higher Inflation Could Delay Further Easing

The latest GDP figures may reduce market expectations for the BoE to cut rates in September. Softer wage growth may signal a pullback in consumer spending, dampening demand-driven inflation. Average earnings, including bonuses, rose 4.6% in June, down from 5% in May. However, inflation forecasts could challenge expectations of further policy easing.

James Smith, Research Director at the Resolution Foundation, remarked:

“Elsewhere, there was grim news about the cost of living… Let’s start with inflation – that is now expected to peak at 4.0% in September, having previously been expected to peak at 3.7%. Inflation is expected to now be higher across the BoE’s forecast period.”

The Bank of England reduced interest rates by 25 basis points to 4% on August 7. A 5-4 vote in favor of cutting rates reflected a divided Monetary Policy Committee, likely increasing focus on inflation.

The next UK CPI report, out on August 20, will likely dictate near-term bets on further BoE rate cuts. Economists forecast the annual inflation rate to rise from 3.6% in June to 4% in July. The BoE may be reluctant to cut rates if inflation climbs higher, pushing back a potential rate cut to November or possibly December.

ING Economics signaled a November BoE rate cut, stating:

“We still think the Bank’s concerns about inflation will prove overblown. There’s no reason in and of itself that inflation will become more entrenched, simply because headline CPI is sitting above target. It relies on workers being able to chase higher wages, as they bid to retain purchasing power.”

However, ING Economics warned:

“We’re sticking to our call, but were the next couple of inflation reports to surprise to the upside, or if the recent falls in private-sector employment start to ease off, then we’ll be rethinking.”

GBP/USD Reaction to the Q2 GDP Report

Before the UK GDP Report, the GBP/USD fell to a low of $1.35639 before climbing to a high of $1.35919.

However, in response to the report, the GBP/USD briefly tumbled to a low of $1.35685 before rising to a high of $1.35858 amid easing bets on a September BoE rate cut.

On Friday, August 14, the GBP/USD was up 0.05% to $1.35806.

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