UK GDP Beats in March, Q1 0.6% Tempers Sterling Rate-Cut Bets

The UK economy expanded 0.6% quarter-on-quarter in Q1 2026, matching the consensus forecast. The March monthly figure surprised to the upside, rising 0.3% against expectations for a -0.1% contraction. The data, driven by a resilient services sector and a surge in construction, immediately shifted the near-term rate path for the Bank of England.

The breakdown of Q1 GDP by sector:

• Services output rose 0.8% qoq, following a 0.2% gain in Q4 2025, and stood 1.4% higher than a year earlier.
• Production expanded 0.2% qoq after a strong 1.3% rise in the previous quarter; annual production growth was flat.
• Construction activity increased 0.4% qoq. The sector remained -1.3% lower than the same period last year.
• Real GDP per head grew 0.6% qoq and was up 0.9% year-on-year.

The March monthly data showed broad-based strength outside of production. Services output rose 0.3% month-on-month. Construction surged 1.5%, offsetting a -0.2% decline in production activity. The construction jump, in particular, suggests that infrastructure and housing projects gained traction heading into the second quarter.

The GDP Print and the Services Engine

The services sector remains the primary driver of UK growth. The 0.8% quarterly expansion in services output builds on a steady recovery from the energy-price shock of 2022-2023. Consumer-facing services and business services both contributed, reflecting resilient household spending and corporate demand. The 1.4% year-on-year increase in services output provides a solid base for overall GDP, even as industrial production struggles to gain momentum.

Construction’s 1.5% monthly surge in March is a notable swing factor. The sector had been a drag on growth for much of 2025, weighed down by higher borrowing costs and planning delays. The March rebound, if sustained, could add a fresh leg to GDP in Q2. Production’s -0.2% monthly decline, however, signals that manufacturing and energy extraction remain vulnerable to elevated input costs and weak external demand.

Transmission to Sterling and Rate Expectations

The stronger-than-expected March GDP figure directly challenges the market’s assumption that the Bank of England will deliver a rate cut in the coming months. Before the release, overnight index swaps had priced a meaningful probability of a June reduction. The data pushes those bets further out. A resilient economy reduces the urgency for monetary easing, keeping the BoE’s focus on sticky services inflation and wage growth.

This dynamic narrows the expected rate differential between the UK and the US. The Federal Reserve has signaled patience on cuts, and if the BoE follows a similar path, the yield advantage that has supported the dollar begins to erode. For GBP/USD (profile), that translates into a firmer floor. The pair had been rangebound ahead of the data, with traders wary of a negative print. The upside surprise may encourage dip-buying and a test of recent resistance levels.

The GDP beat follows a pattern of UK data exceeding low expectations. The recent services output beat had already prompted a paring back of rate-cut bets. Today’s release reinforces that trend. Elevated energy costs and political uncertainty surrounding Prime Minister Keir Starmer’s government cloud the broader outlook. The hard data, however, shows an economy that is absorbing those headwinds without stalling.

Next Marker: BoE June Decision

The Bank of England’s Monetary Policy Committee will have this GDP report in hand when it meets in June. The 0.6% quarterly growth rate and the March upside surprise give the committee ample reason to hold rates steady. The MPC’s hawks will point to the services strength and construction rebound as evidence that demand is not collapsing. Doves may still argue that the production weakness and political uncertainty warrant caution. The growth numbers tilt the balance toward a pause.

For sterling traders, the June meeting becomes the next concrete catalyst. Any shift in the BoE’s forward guidance–particularly around the timing of a first cut–will move GBP/USD more than the data itself. Until then, the GDP print provides a tactical tailwind. The pair’s path of least resistance is higher, provided that upcoming inflation and labour market data do not undermine the growth narrative. For broader forex context, see our forex market analysis.