Stronger-than-expected UK economic data added to expectations of further interest rate increases on Thursday, although there are growing questions about how long the economy can sustain its current momentum.
Figures from the Office for National Statistics showed the UK economy grew by 0.7% in the third quarter, up from 0.5% in the previous three months and in line with economists’ expectations.
Annual growth accelerated to 1.9% from 1.4%, while monthly GDP increased by 0.2% in September, ahead of forecasts.
The figures reinforced expectations that the Bank of England could raise interest rates again before the end of the year, with markets pricing in one increase by December and another by March.
However, before assuming Thursday’s GDP figures signal the beginning of a prolonged period of monetary tightening, there are reasons to be cautious.
While stronger growth increases the likelihood of another Bank Rate rise in the short term, the economic outlook further ahead is looking considerably less encouraging.
CONSTRUCTION SECTOR UNDER PRESSURE
UK construction orders fell 25.3% year-on-year in the third quarter of 2026, following an 18.5% decline in the previous quarter.
That marked a third consecutive quarterly contraction and the steepest annual fall since the final quarter of 2023.
The figures provide a reminder that while the wider economy may be demonstrating some resilience, significant parts of it remain under considerable pressure.
KPMG chief economist Yael Selfin also expects economic growth to stall in the final quarter of the year as higher energy prices and interest rates weigh on consumer spending.
Weak confidence and concerns about rising unemployment are adding to the pressure on household demand.
For mortgage markets, that is an important consideration. A weakening economy could ultimately limit the Bank of England’s ability to continue increasing borrowing costs, even if inflation remains above target.
HOW MANY MORE RATE RISES?
So, while another Bank Rate increase in December looks increasingly likely, the outlook beyond that remains far from certain.
The Bank faces a familiar dilemma. Raise rates too aggressively and risk weakening an already fragile economy, or move too cautiously and allow inflationary pressures to become more deeply embedded.
As we have said before, multiple increases over the next year are far from a certainty.
Much will depend on whether higher energy prices continue to feed through into wider inflation and whether the labour market and consumer spending weaken further.
For borrowers and brokers, the distinction between the next Bank Rate decision and the longer-term direction of interest rates remains particularly important.
GILTS AND SWAPS MOVE HIGHER
UK 10-year gilt yields edged back above 5.2% on Thursday, recovering from their lowest levels in more than two months as stronger economic data reinforced expectations of further monetary tightening.
Swap rates also moved higher, rising between 3.1 and 5.7 basis points across the curve.
That is another unwelcome development for mortgage markets following the increases seen earlier in the week.
However, while short-term interest rate expectations have strengthened, the longer-term outlook remains more complicated.
If economic growth slows sharply over the coming months, markets may eventually reassess how much further the Bank of England can realistically raise rates.
For now, though, the direction of swap rates remains something for lenders and brokers to watch closely.
OIL RESUMES ITS YO-YOING
Lastly, oil prices resumed their familiar yo-yoing on Thursday, with Brent crude rising around 1% to approximately $93 a barrel.
The increase followed comments from Donald Trump suggesting the US no longer needed a deal with Iran, signalling a retreat from recent diplomatic efforts.
Tehran showed little sign of softening its position either, with senior officials ruling out the removal of enriched nuclear material from the country.
It looks as though we are back in familiar territory, with oil prices once again at the mercy of the latest political developments and headlines.
For the UK, that continued uncertainty matters because another sustained rise in energy prices could complicate the inflation outlook and increase pressure on the Bank of England to tighten monetary policy further.
And, as we have seen repeatedly, what appears to be a promising diplomatic development one day can unravel remarkably quickly the next.
THURSDAY’S MARKET SNAPSHOT
Brent crude was trading around 1% higher at approximately $93 a barrel on Thursday afternoon.
The FTSE 100 closed 0.29% higher at 10,867, while UK 10-year gilt yields rose to around 5.3%.
Swap rates increased between 3.1 and 5.7 basis points.
For mortgage markets, Thursday’s figures provided another reminder of the difficult balance facing policymakers.
Stronger economic growth may justify further interest rate increases in the short term, but weakening construction activity and growing pressure on household finances suggest there may be limits to how far the Bank can go.
The next few months should tell us whether the UK economy is resilient enough to withstand further tightening or whether the Bank of England will eventually need to think again.
Walter Avrili is technical director at Mortgageforce
