UK markets were little changed this week, with the FTSE 100 Index gaining 0.05% to trade at 9,090 points at the time of writing.
The Bank of England lowered interest rates by 0.25% to 4% on Thursday, but the split decision and higher inflation forecasts prompted investors to rein in bets on further cuts. In an unprecedented second vote by the central bank’s Monetary Policy Committee, after it initially failed to reach a majority verdict, five members backed the quarter-point cut, while four voted to keep rates on hold. The split vote highlighted deep divisions in views of Monetary Policy Committee members over the challenges of weak growth and stubborn inflation. It also left businesses and consumers facing the possibility of interest rates staying higher for longer than expected.
Bank of England governor Andrew Baily said that the path of interest rates “continues to be downward.” However, he added that there is now “genuine uncertainty” because the Monetary Policy Committee saw risks of both inflation overshooting its forecasts and growth undershooting.
The central bank warned that food prices would drive inflation further above target in the near term, predicting a peak of 4% in September, above previous estimates. UK inflation is running at much higher levels than in the US or the Eurozone, while economic growth is slowing. The combination has raised fears that the UK could be entering a period of stagflation.
Rachel Reeves faces a £51 billion black hole in the public finances, according to forecasts published by the National Institute for Economic and Social Research, which warned the UK chancellor will be forced to raise taxes in the Autumn Budget if she is to meet her spending pledges and stick to her fiscal rules.
The forecasts suggested that Reeves would need to fill a hole of £41.2 billion in October’s Budget to stay on course to meet her key fiscal target of balancing day-to-day spending with revenues by 2029-2030. The shortfall would rise to £51.1 billion if Reeves were to restore the headroom of £9.9 billion which she had previously built into her plans.
Commodity markets
In the commodity markets, Brent crude futures were trading around $67 per barrel on Friday, set for a weekly decline, after the Kremlin announced that Russian President Vladimir Putin will meet US President Donald Trump in the coming days. The summit, the first since 2021, has raised hopes for a diplomatic resolution to the war in Ukraine.
Nevertheless, the US has continued preparations to imposed secondary sanctions on buyers of Russian oil, potentially including China, to pressure Moscow to end the war in Ukraine. Russia is the world’s second-biggest producer of oil, behind the United States. In China, crude oil imports dipped 5.4% in July from June, but were still up 11.5% year on year, with analysts expecting refining activity to remain strong in the near term.
Saudi Arabia, the world’s largest oil exporter, raised its September crude oil prices for Asian buyers, marking the second consecutive monthly increase due to tight supply and strong demand. However, global macroeconomic uncertainty limited price gains after the US imposed a fresh 25% tariff on Indian goods, citing continued imports of Russian oil. The new tariff will take effect on 28th August.
Gold prices traded around $3,400 an ounce on Friday and are set for a weekly rise, as renewed trade tensions sparked by steep US tariffs boosted safe-haven demand, while a weaker dollar and growing interest-rate cut bets added to bullion’s appeal.
Equity markets
US equity futures rose on Friday as expectations of Federal Reserve rate cuts grew, over the economic impact of new tariffs. In Thursday’s regular trading session, the Dow Jones Industrial Average lost 0.51%, the S&P 500 fell 0.08%, whilst the Nasdaq Composite gained 0.35%.
Donald Trump’s latest tariff hikes, ranging from 10% to 50% and targeting dozens of countries, took effect on Thursday, further testing his aggressive strategy. He also announced plans for a 100% tariff on semiconductor imports, with exemptions for companies manufacturing in the US. The new plan was revealed during a meeting with Apple CEO Tim Cook, who pledged to increase his company’s US investments by $100 billion in the coming years.
Trump’s trade policies have been broadly aimed at reshaping the global trading system, which he sees as treating the US unfairly. He is using tariffs to encourage jobs and manufacturing industries to return to America, among other political goals. American import duties are now at their highest level in a century, despite frantic lobbying by foreign capitals to escape the levies driving Trump’s economic agenda. The reciprocal tariffs will raise levies even on economies with new US trade deals, including the EU and Japan.
China, the world’s biggest exporter, is under a separate trade agreement with the US which is due to go into effect on 12th August. Trump has also said he will soon announce other tariffs on pharmaceuticals, consumer electronics, and other sectors, which are exempt from the reciprocal tariffs.
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