For the data behind the commentary, download the full August 2026 UK Economy & Housing Report.
(EVEN) HIGHER FOR (EVEN) LONGER
The good news story of the month is that the economy has proved to be resilient. GDP grew 0.4% in July, following 0.3% in June, meaning that the economy had grown 1.6% on the year. Notably, growth for the month has come from sub-sectors engaged in AI and technology, the first signs of the hoped-for productivity that could deliver growth the government has promised.
Unfortunately, this is not where the majority of economic discourse has been – or will be – for the short term. With the Autumn Budget just over a month out, there is already conjecture on the extent to the measures which the new Chancellor can take against a backdrop of increased public debt, and higher borrowing costs.
The 10-year gilt touched its highest level since 2007 at 5.44%, before coming in to 5.3% off the back of the MPC meeting – still 100 basis points above where they were at the onset of the war in Iran.
While the September MPC meeting saw a decision to hold, four of the six who voted to hold said that if the conflict persists policy is likely to have to tighten. With the Fed raising the day before, for the first time since 2023, and the ECB having hiked twice since June, there is now an increased likelihood of a 25 basis points increase in November, with an additional potential hike early in 2027. It is worth noting that financial conditions have already tightened materially without the Bank Rate moving at all. Two- and Five- year fixed mortgages have risen by 82bps and 61bps since the start of the war, while the five-year SONIA is up to 4.8%.
This is despite the fact that for now inflationary data is just about holding firm – excluding direct energy pricing. The August data showed no domestic spillover from energy: core and services inflation were unchanged, food inflation is at a five-year low and private sector regular pay growth of 2.9% is below the rate the MPC associates with target-consistent inflation.
In the short and medium term, the question falls to the price of bonds. With the public sector debt of advanced economies – including notably the US and UK – now further in the spotlight, there is likely to be a larger and more persistent pressure on bonds. The September QT decision to run the gilt portfolio to 2034 has taken some heat out of the market but has also confirmed that active sales lie ahead. For now, the prospect of sub-4% bonds seems some way off, which will impact the pricing of real estate.
