Pound's Stability Tested by Rising Inflation and Growth

Despite mixed performance in August, the British Pound remains an interesting story as UK economists expect the Bank of England to hold off on raising interest rates until at least end-2027. Pantheon Macroeconomics' Robert Wood and Elliott Jordan-Doak argue that recent data has not altered the Monetary Policy Committee's preference to wait, but acknowledge that inflation and growth are stronger than expected.

UK GDP grew 0.4% quarter-on-quarter in Q2, beating the MPC's forecast of 0.3%, while August PMI data suggest roughly 0.2% growth in Q3 rather than the BoE's assumption of 0.1%. Consumer confidence has also climbed towards a two-year high.

However, energy prices are making the decision harder for policymakers. Ofgem has raised the household energy price cap by 4%, and Pantheon expects UK CPI inflation to peak at 3.7% in January and February 2027.