HG MARKETS:

The UK economy showed stronger-than-expected growth in the first quarter of 2025, raising questions about the timing of future interest rate cuts by the Bank of England (BoE). GDP rose by 0.7% quarter-on-quarter in March, marking a clear acceleration from the modest 0.1% expansion recorded in the final quarter of 2024. On an annual basis, the economy grew by 1.3% in Q1, slightly down from the previous quarter’s 1.5%, but still ahead of economists’ forecasts.

Much of the quarterly growth was driven by the services sector, which rose 0.7% and was the main contributor to overall output. Industrial production also bounced back with a 1.1% increase after three consecutive quarters of decline, while manufacturing grew by 0.8%. Consumer spending saw a modest 0.2% rise, with gains in goods, services, and housing-related categories.

Despite these upbeat figures, some analysts urged restraint. Pepperstone strategist M. Brown argued the numbers were distorted by temporary factors, such as a surge in exports ahead of US tariffs and consumer and business activity brought forward before the new tax year’s changes, including a National Insurance rise and a higher minimum wage. He emphasized that more recent indicators, such as the April PMI data showing a sharp drop in output, suggest the economy may already be losing momentum.

In terms of monetary policy, the GDP release followed mixed labor market data. BoE official Catherine Mann acknowledged the labor market’s resilience but noted signs of a gradual slowdown. Unemployment edged higher, likely reflecting more people entering the workforce, while wage growth remained relatively strong at 5.5% annually in Q1, down slightly from 5.7% in Q4.

BoE Chief Economist Huw Pill added to the cautious tone, stating that interest rates might need to remain elevated to control inflation. These remarks, alongside solid economic data, have caused markets to reassess expectations of imminent rate cuts.

In currency markets, the British pound initially dipped following the GDP release but later rebounded. The GBP/USD exchange rate touched a low of $1.32692 before recovering to around $1.32855, as traders weighed the implications for BoE policy. By May 15, the pair had risen 0.23% to $1.32834, reflecting a mixed but still somewhat positive sentiment toward the UK economy.