Share prices in the UK generally fell during February as a whole, as concerns over the prospect of a Russian invasion of Ukraine turned into reality. Many governments, including the UK, the US and the EU, implemented sanctions against Russian financial institutions – including the country’s central bank – and against key individuals.
- The BoE increased its base rate to 0.5%
- Consumer price inflation rose to 5.5% YoY
- The UK economy expanded by 7.5% in 2021
Markets respond to Russian invasion of Ukraine: share prices in the UK generally fell during February as a whole, as concerns over the prospect of a Russian invasion of Ukraine turned into reality. Many governments, including the UK, the US and the EU, implemented sanctions against Russian financial institutions – including the country’s central bank – and against key individuals. Prime Minister Boris Johnson commented: “Countries that together comprise about half the world economy are now engaged in maximising economic pressure on one that makes up a mere 2%”. Oil giant BP announced that it intended to divest its 19.75% stake in Russian state-owned oil company Rosneft. Having dropped sharply, the FTSE 100 Index recovered some ground to end February only 0.1% lower; however, the FTSE 250 Index fell by 3.9% during the month.
“The BRC warned that it would be impossible to protect consumers from future cost increases”
BoE raises rates: in a bid to curb inflationary pressures, the Bank of England (BoE) raised its key base rate from 0.25% to 0.50% during February. Of the nine members of the Monetary Policy Committee (MPC), five voted in favour of the 25 basis point increase, while four argued for a rise of 50 basis points.
Inflation continues to bite: the rate of consumer price inflation reached 5.5% year on year during January, hitting its highest level since March 1992. Meanwhile, according to the British Retail Consortium (BRC), shop price annual inflation almost doubled from 0.8% in December to 1.5% in January, driven by sharp price increases for non-food products. The BRC warned that it would be impossible to protect consumers from future cost increases. However, wage growth has not kept pace with inflation: average earnings (excluding bonuses) rose at an annualised rate of 3.7% in the final three months of 2021.
Question-marks over longer-term economic growth: having contracted by 9.4% in 2020, the UK economy expanded by 7.5% over 2021, although it contracted by 0.2% in December as the Omicron variant affected activity in the retail and hospitality sectors. The short-term growth outlook for the UK remains strong, according to the International Monetary Fund’s (IMF’s) recent report on the economy. Nevertheless, the UK faces “considerable” risks: in particular, the possibility of further waves of Covid-19 and the impact of tensions in Eastern Europe. Looking ahead, the IMF expects the UK economy to expand by 4.7% this year and 2.3% next year.
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