UK growth, inflation and rates update

Growth
The BoE revised its 2025 GDP forecast upward from 0.75% to 1.0%, reflecting stronger than expected performance in the first quarter. Policymakers emphasised that uncertainty in the British economy remains elevated, particularly as experts wait to assess the fallout from Donald Trump’s trade war.
UK consumer confidence ticked up in May following the rate cut and a new trade deal with the US, which is expected to alleviate some of the pain from US tariffs. After a sharp drop in confidence in April, the rebound from -23 to -20 in the GfK gauge points towards a drop in fears of a recession. The strength of the UK consumer was further displayed with the release of April’s retail sales data, where sales soared by 5.3% y/y vs an expected 4.4%. April was the sunniest month on record in the UK, which experts say provided a notable boost to food and beverage sales. The data offers hope that the UK economy can weather headwinds in the form of tax hikes, rising bills and Trump’s tariff war to accelerate growth and keep Chancellor of the Exchequer Rachel Reeves spending plans on track.
Inflation
Softer than expected inflation data for the month of February and March, 2.80% and 2.60% yy respectively, compared to 3.0% yy in January allowed the Bank of England to cut rates in May.  Following the rate cut, inflation for the month of April came in higher than expected at 3.5% yy vs estimates of 3.3%. Higher prices were driven largely by steeper energy costs after regulators raised the household price cap. Higher travel costs also contributed.
Rates
On 8th May 2025, the Bank of England voted to cut interest rates by 25 bps to 4.25%. The decision This gave the UK central bank room to shift its focus more towards UK growth. The decision was mixed, with 5 members voting for the quarter point cut and the other 4 split equally between no cuts and 2 cuts.
Following the latest uptick in inflation data, swap markets are now pricing in just one 25 bps rate cut over the next year, compared to two before the data release.