UK markets fell heavily in September, with mid caps faring particularly badly as sentiment towards domestically focused stocks turned sour. Over September, the FTSE 100 Index fell by 5.4% while the FTSE 250 Index tumbled by 9.9%.
- The UK base rate was raised by 50bp to 2.25%
- The pound fell as low as US$1.04
- The BoE took action to restore order in markets
Mid-caps take a hit: UK markets fell heavily in September, with mid caps faring particularly badly as sentiment towards domestically focused stocks turned sour. Over September, the FTSE 100 Index fell by 5.4% while the FTSE 250 Index tumbled by 9.9%. Since the beginning of 2022, the FTSE 100 Index has dropped by 6.6%, while the FTSE 250 Index has fallen by 26.9%.
“Sentiment towards UK plc was undermined by a controversial ‘mini-budget’”
Interest rates rise again: the Bank of England (BoE) raised the UK’s key interest rate from 1.75% to 2.25% during the month, taking them to their highest level since 2008. The BoE’s Monetary Policy Committee (MPC) confirmed that it would implement further increases as necessary. The rate of consumer price inflation eased from 10.1% year on year in July to 9.9%, dampened slightly by lower fuel prices. However, food price inflation surged to its highest level since August 2008. Looking ahead, inflationary pressures are expected to intensify, underpinned by “domestically generated inflation”. The BoE now predicts inflation will peak at just under 11% rather than 13% following the announcement of the Government’s Energy Price Guarantee.
Pound under pressure: sentiment towards UK plc was undermined by a controversial ‘mini-budget’ announced by the new Government’s Chancellor of the Exchequer, Kwasi Kwarteng. The mini-budget – described by the Institute for Fiscal Studies (IFS) as “the biggest tax event since 1972” included a raft of controversial tax cuts funded by borrowing, which triggered a sharp decline in the value of the pound – which fell as low as US$1.04 – and plummeting gilt prices. Having begun September at 2.81%, the yield on the benchmark UK gilt spiked at 4.54% before ending the month at 4.09%.
Emergency bond purchases: speculation that the BoE might be forced to take emergency action in response to the mini-Budget was quashed by the central bank, which nevertheless confirmed that it “will not hesitate” to change interest rates “by as much as needed” to return inflation to its 2% target. The next scheduled meeting of the MPC will take place on 3 November. Nevertheless, in a move designed “to restore orderly market conditions”, the BoE announced an emergency programme of bond purchases, commenting: “Were dysfunction in this market to continue or worsen, there would be a material risk to UK financial stability”. The strategy provided a boost for the pound , which rallied to end the month at US$1.12.
To view the series of market updates through September, click here
