UK markets rose this week with the FTSE 100 Index gaining 1.8% to trade at 7,460 points at the time of writing. The Bank of England kept interest rates on hold at a 15-year high of 5.25% for the second successive meeting on Thursday but warned monetary policy would need to stay tight for an extended period of time, despite a bleak economic outlook.
The UK central bank said that growth would remain well below historical averages over the medium term, even as its forecasts signalled that inflation is set to remain more persistent than it previously expected. Bank of England Governor, Andrew Bailey said the Monetary Policy committee would be watching closely to see if further rate rises were needed, stating that it is too early to be thinking about rate cuts.
Current forecasts by the Bank of England suggest that the UK government will hit its goal of halving inflation by the end of the year but will only drop below its 2% target at the end of 2025. Growth is expected to be flat in the third quarter of this year, weaker than previously expected, with only a 0.1% expansion in the final three months. Output is anticipated to remain stagnant throughout 2024, with a significant risk of a contraction.
The downbeat picture reflects the pressure imposed by the central bank’s 14 rate rises since December 2021, with the Bank of England estimating that only about half of the impact on GDP has been felt to date. The unwinding of previous fiscal support could also weigh down the UK’s prospects, as could supply constraints.
Elsewhere, The British Retail Consortium said on Tuesday that UK shop inflation has eased to its lowest rate in more than a year, falling to 5.2% in October from 6.2% in September, helped by falling prices of home grown food. This marked the fifth consecutive monthly decline, and the lowest rate since August 2022, suggesting that the impact on households from historically high grocery costs is continuing to abate.
Commodity markets
In the commodity markets, Brent crude futures traded around $87 per barrel on Friday and are set for a weekly decline, after facing heavy selling pressure earlier in the week, amid growing expectations that the Israel-Hamas war could be prevented from spreading through the oil-rich region.
Weaker than expected manufacturing activity data in the US and China also clouded the demand outlook in two of the world’s largest oil consumers. Oil prices began to rise again towards the end of the week as risk appetite in the financial markets returned after the US Federal Reserve and the Bank of England kept interest rates on hold. On the supply front, top oil exporter Saudi Arabia is expected to reconfirm an extension of its voluntary oil-output cut of 1 million barrels per day through December, analysts told Reuters on Thursday.
Gold traded around $1,990 an ounce on Friday as the US Dollar and Treasury yields retreated on raised bets that the Federal Reserve may have finished raising interest rates, while investors await US non-farm payrolls data for further cues.
Equity markets
US equity futures fell on Friday, after closing sharply higher on Thursday, as sentiment was boosted by the Federal Reserve’s latest decision and falling treasury yields.
In Thursday’s regular trading session, The Dow Jones Industrial Average rose 1.7%, the S&P 500 Index soared 1.89%, while the Nasdaq Composite advanced 1.78%. The US Federal Reserve held interest rates at a 22-year high on Wednesday, but kept open the possibility of further monetary tightening, amid mounting evidence that the US economy remained strong.
The meeting was the second in a row at which the Federal Open Market Committee opted not to increase interest rates, as officials seek more clarity on whether monetary policy is already tight enough to curb inflation. After 11 increases since March 2022, the benchmark federal funds rate remains between 5.25% and 5.5%. Strong economic data, including a robust labour market and consumer spending that drove faster than expected gross domestic product growth in the third quarter, may have left the central bank with more work to do to meet its inflation target, Federal Reserve chair Jerome Powell indicated after the meeting. However, he added that the central bank could proceed carefully with future decisions, amid signs that past rate rises were having an effect on the economy.
The meeting came against a backdrop of persistent strength in the US economy, with consumer spending remaining high and unemployment historically low. Some economists worry that the country’s economic strength could halt or slow the decline in inflation, making it harder to reach the Federal Reserve’s longstanding target of 2% and potentially requiring it to impose higher borrowing costs. Figures published on Wednesday showed that the labour market remains strong, with the number of job vacancies above expectations, while data earlier in the week indicated that wage growth remains high.
The information provided in this communication is not advice or a personal recommendation, and you should not make any investment decisions on the basis of it. If you are unsure of whether an investment is right for you, please seek advice. If you choose to invest, your capital may be at risk and the value of an investment may fall as well as rise in value, so you could get back less than you originally invested.