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15 Sept 2026 | 3 minutes to read
(All equity data is MSCI; all data in sterling unless stated)
The UK economy expanded by more-than-expected in July, with Gross Domestic Product (GDP) rising +0.4%. The print beat expectations of a flat reading and followed June’s +0.3% increase. The services sector was the main driver, with computer programming the largest contributor to activity. Over the three months to July, the economy expanded by +0.4%, marking an eighth such consecutive period of gains. The latest data provide encouraging evidence of resilience despite ongoing global uncertainties, higher energy prices and potentially higher interest rates.
Activity in technology-related services was particularly strong among firms benefiting from AI adoption, suggesting they continue to invest and innovate. With economic activity holding up, policymakers at the Bank of England may feel less urgency to increase interest rates in the near term, although inflation remains above target. Markets continue to anticipate lower rates in the long run, but near-term the latest data support a ‘higher-for-longer’ interest rate environment.
The figures also provide a more positive backdrop ahead of the Chancellor's October Budget. Stronger economic activity should support tax revenues and could ease some pressure on public finances, potentially giving the government modestly more spending headroom. While a single month's GDP data does not establish a trend, the latest figures reinforce the view that the UK economy is on a firmer footing than many had expected.
The European Central Bank has increased its key deposit rate from 2.25% to 2.5% in a move broadly anticipated by investors. The ECB’s second hike this year signals policymakers’ concerns over energy-fed inflation damaging the eurozone – although the economy has proven relatively resilient despite geopolitical uncertainty. The vote came as oil topped $100 per barrel with the conflict in the Middle East intensifying as the US and Iran traded strikes – risking the war spreading throughout the region. It’s uncertain whether the ECB’s rate rise will impact inflation or economic growth. But it does limit how borrowers can manage any economic crisis in future. The hike contributed to higher yields as investors sold 10-year government debt (yields and prices are inversely correlated). From here, the ECB remains data-dependent: after two rate rises, it’ll probably wait-and-see at the October meeting and reassess the impact of its tighter monetary policy towards year-end.
US Consumer Price Index (CPI) inflation rose by 0.4% in August and 3.4% annually, driven by higher energy costs as the war in the Middle East ratchets up. The figures were in-line with expectations and leave rate-setters at the US Federal Reserve a delicate balancing act later this week.
Gasoline prices accelerated 3.9% for August alone – more than a third of the headline gain – and are up 27.4% over 12 months, with diesel topping $6 a gallon in some states – a new high. Policymakers will be watching price gains across transport services, vehicle prices, and shelter costs to assess whether higher energy prices are seeping into the broader economy. Although price pressures are not yet filtering into wage growth, headline inflation now outpaces wages – up 3.1% over the year to August – squeezing workers on Main Street.
Fed Chair, Kevin Warsh, is playing his cards close to his chest, despite some commentators construing his recent comments as pro-rate hike. And other policymakers and commentators favour a patient approach. The Fed has left the benchmark interest rate on hold all year, with the last five committee meetings in a row pegging it in a 3.5%-3.75% range.
Rising inflation, a robust US jobs market, and President Trump saying the Iran war and higher oil prices will continue until after the mid-terms, may all tempt the Fed to hike. With consumer prices accelerating again – and notably higher than the Fed's 2% target – policymakers might feel they have little choice. And it is not only the Fed’s moment of truth, as the Bank of England (BoE) and the Bank of Japan (BoJ) also vote on rates this week.
The decisions come amidst turbulent global bond markets, as government borrowing costs have risen sharply. US Treasury Secretary, Scott Bessent, has recently intervened in markets in an attempt to ease the sell-off in US government bonds, including coordinated action with Japanese policymakers to prop up the yen, with limited success.
Both the Fed and the BoJ are expected to hike rates this week, or risk increased bond market volatility if they don’t act. On the one hand, longer-dated bonds could sell off if investors don’t believe that policymakers have a grip on inflation. Higher yields would inflame the fiscal challenges respective governments are facing, as their attempts to manage and service outstanding debt get more expensive. On the other, decisive action could calm bond markets.
If the BoJ increases its policy rate by 0.25% to 1.25%, it would be the highest level for more than 30 years. Perhaps more interesting still will be an indication of how quickly the BoJ might push through future rate hikes. For the BoE, the decision is slightly more finely balanced. Governor Andrew Bailey has suggested that rising mortgage rates have already tightened monetary conditions a little. That said, last week’s stronger-than-expected GDP print could increase inflation fears and give policymakers greater confidence that the economy can withstand higher rates.
Beijing has scaled up plans to support economic growth, and cushion against a further slowdown in loan growth, by pledging a further 360bn yuan ($54bn) for the country’s largest banks and insurers. The latest recapitalisation plan comes on top of the 500bn yuan package announced in June last year. Since then, loan growth has continued to deteriorate amid weak domestic demand, adding pressure on policymakers to provide further fiscal support.
Trade continues to remain a bright spot for the economy, offsetting domestic weakness. Exports grew 25% in the year to August, in line with expectations, with technology goods accounting for more than half of the increase as China continues to benefit from the AI buildout. On the inflation front, August’s data showed annual prices rising to 0.8% from 0.5% in July, but in line with forecasts. Much of the rise was attributed to rising energy prices rather than local demand.
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