2025 proved to be a standout year for the FTSE 100 Index, which notched up its best annual performance since 2009 and outperformed US equity markets over the year. The FTSE 100 Index rose by 2.2% during December, and by 21.5% over 2025 as a whole.
- The BoE cut UK base rate to 3.75%
- The UK economy shrank by 0.1% over the three months to October
- Consumer price inflation eased to 3.2% YoY
A strong year for UK equities: 2025 proved to be a standout year for the FTSE 100 Index, which notched up its best annual performance since 2009 and outperformed US equity markets over the year. The FTSE 100 Index rose by 2.2% during December, and by 21.5% over 2025 as a whole. In comparison, the FTSE 250 Index climbed by 1.4% over the month and by 9% over the year. In a review of FTSE 100 Index constituents, British Land was promoted to the blue-chip index, while WPP was relegated to the FTSE 250 Index.
“The Bank of England highlighted the risk of a “sharp correction” in its Financial Stability Report”
Valuation concerns: the Bank of England (BoE) highlighted the risk of a “sharp correction” in its Financial Stability Report. In particular, BoE Governor Andrew Bailey warned: “On some measures, equity valuations in the US are approaching levels not seen since the dotcom bubble, and in the EU and UK, since the global financial crisis. The AI sector is a particular hot spot.”
Rate cut: the BoE cut UK interest rates to their lowest level in almost three years during December, reducing the key base rate from 4% to 3.75%. Officials cited the impact of “subdued economic growth (and) building slack in the labour market”. Lower prices for food, drink and tobacco helped the rate of consumer price inflation to fall to from 3.6% to 3.2% year on year in November, reaching its lowest level since March.
“Pre-Budget jitters”: the UK economy contracted by 0.1% in the three months to October, shrinking by 0.1% in the months of October and September, and stalling in August. Concerns ahead of November’s Budget curbed activity in October. Elsewhere, “pre-Budget jitters” resulted in a lacklustre Black Friday for the UK’s retail sector; the British Retail Consortium reported that sales rose by 1.4% year on year in November, compared with the 12-month average of 2.5%. The rate of unemployment rose to 5.1% over the three months to October, and the number of unemployed people in the UK reached its highest level since January 2021.
Economic headwinds? The Organisation for Economic Cooperation & Development (OECD) expects the UK economy to grow by 1.2% this year and by 1.3% next year. Economic activity is set to be hampered by the impact of tax and spending adjustments; the OECD warned that tax-raising measures from November’s Budget will “act as a headwind to the economy”.
To view the series of market updates through December, click here
