The Bank of England struck a slightly more optimistic tone during February, providing a boost for investor sentiment and fuelling hopes that inflation may finally be starting to moderate. The benchmark FTSE 100 Index breached 8,000 points during the month to reach a new all-time high.
- The BoE raised the base rate to 4%
- The CPI rate fell for a third straight month
- The UK is still expected to slip into recession
FTSE breaches 8,000 points: the Bank of England (BoE) struck a slightly more optimistic tone during February, providing a boost for investor sentiment and fuelling hopes that inflation may finally be starting to moderate. The benchmark FTSE 100 Index breached 8,000 points during the month to reach a new all-time high. Sentiment was also lifted by news of strong employment data from the US, which drove up the US dollar , in turn pushing up the value of UK blue chip companies that have a high proportion of dollar-denominated earnings. The FTSE 100 Index rose by 1.3% over February as a whole, while the FTSE 250 Index climbed by 0.3%.
“Policymakers believe inflation is likely to have peaked and is set to “fall sharply” to 4% by the end of 2023”
Rates rise to 4%: the BoE raised the key base rate during February by 50 basis points, increasing it to 4% – its highest level since 2008. Rates were raised to cool the inflationary pressure of higher prices and rising wages. Having peaked at 11.1% in October, the annualised rate of consumer price inflation fell for a third consecutive month in January, easing from 10.5% to 10.1%. Nevertheless, food price inflation remained strong at 16.7%. Average earnings (excluding bonuses) grew by 6.7% year on year during the final three months of 2022; once adjusted for inflation, however, wages fell in real terms by 2.5%.
Has inflation peaked? Policymakers believe inflation is likely to have peaked and is set to “fall sharply” to 4% by the end of 2023, although this will remain considerably higher than the central bank’s rolling 2% target. BoE Governor Andrew Bailey commented that inflation may have seen “a turning of the corner” but cautioned that it was still “very early days”.
Lacklustre growth: widespread strike action dampened economic activity in the UK in December, resulting in an economic contraction of 0.5% during the month. According to the Office for National Statistics (ONS) , the UK lost 843,000 working days to industrial action during December – the most since November 2011. Nevertheless, the UK managed to sidestep recession, stagnating during the final three months of 2022 after contracting by 0.2% during the third quarter. Over 2022 as a whole, the UK economy expanded by 4%. Although BoE officials still expect the UK economy to slip into recession, it is believed likely to prove shorter and shallower than previously feared.
To view the series of market updates through February, click here
