Investor sentiment and market movements were dominated in March by unfolding developments in the Middle East as the conflict between the US and Iran intensified. During the month, the FTSE 100 Index dropped by 6.7%, while the FTSE 250 Index fell by 10.7%.
- Higher energy prices are set to stoke inflation
- The 10-year gilt yield breached 5%
- The OBR expects the tax take to reach a post-war high by 2030-31
UK markets fell in March: Investor sentiment and market movements were dominated in March by unfolding developments in the Middle East as the conflict between the US and Iran intensified. During the month, the FTSE 100 Index dropped by 6.7%, while the FTSE 250 Index fell by 10.7%. Amid speculation over the prospect of interest rate increases – rather than the rate cuts anticipated by many investors before war broke out – the yield on the 10-year gilt breached 5%. The Bank of England left interest rates unchanged at 3.75% in March, but confirmed that it “stands ready to act” to ensure inflation remains on track to meet its 2% target in the medium term. The annualised rate of inflation remained at 3% in February, but is widely expected to have risen sharply in March in response to higher energy prices.
“UK consumer expectations collapsed to their lowest level on record”
Inflation set to reach 4%? The Organisation for Economic Cooperation & Development (OECD) downgraded its forecast for UK economic growth this year from 1.2% to 0.7%, putting the UK second-bottom amongst its G7 peers. The UK’s rate of inflation is now forecast to reach 4% this year, compared with the OECD’s previous prediction of 2.5%. This is the second-highest inflation forecast in the G7, surpassed only by the US at 4.2%. The OECD also cautioned that “adjustments” to monetary policy might be necessary if inflationary pressures broaden or if growth prospects weaken substantially.
Consumers under pressure: a survey undertaken by the British Retail Consortium (BRC) and Opinium found that UK consumer expectations collapsed to their lowest level on record for both the state of the UK economy and personal financial situations. Elsewhere, GfK’s survey of consumer sentiment reported further deterioration and warned: “A ripple of fear is spreading … People simply do not feel the economy is robust enough to ride out the knock-on effects from the Middle East conflict.” According to the BRC, higher costs resulting from the conflict are already feeding into supply chains.
Tax take set to reach post-war high: in the government’s Spring Statement, the Office for Budget Responsibility (OBR) cut its forecast for UK economic growth in 2026 from 1.4% to 1.1% and predicted that taxes would reach a post-war high of 38% of GDP by 2030-31, with personal taxes accounting for almost half that increase.
To view the series of market updates through March, click here
