UK markets continued their rebound this week, with the FTSE 100 Index rising 1.8% to trade at 10,640 points at the time of writing.
Divisions within the Bank of England are likely to reopen later this month over how aggressive it needs to be in tackling the effects of the Iran war and preventing a rebound in inflation. Andrew Bailey, the bank’s governor, has indicated that he expects depressed UK demand and labour markets to make “second round” effects from surging energy and food prices less dangerous than in 2021-22, reducing the risk of another wage-price spiral.
However, other Monetary Policy Committee members, including chief economist Huw Pill and deputy governor Clare Lombardelli, are likely to sound less positive, given their hawkish track records. After a rare unanimous vote to hold rates at 3.75% in March, conflicting approaches could re-emerge at the Monetary Policy Committee’s April 29th Meeting as policymakers debate scenarios for how the energy shock unfolds.
The expected rise in inflation linked to the Iran war is fuelling trade union demands for ministers to boost public sector pay, with projections that it will cost £5 billion to keep wages rising in line with the cost of living. The public sector wage bill stood at £288 billion in 2024-25. As a rule of thumb, each percentage point increase in public sector pay around costs £3 billion. Unions representing NHS and local government workers in England have complained that their members are getting a worse deal than striking resident doctors, adding to pressure on Sir Keir Starmer’s government to raise public sector pay. When Chancellor Rachel Reeves set departmental budgets at last summer’s Spending Review, the Office for Budget Responsibility was forecasting consumer price inflation of around 2% for 2026 and 2027. New OECD forecasts, reflecting the likely impact of the Iran war on energy costs, are for UK inflation to average 4% in 2026 and 2.6% in 2027.
Rising inflation throws up a dilemma for ministers, who are operating under tight Treasury spending constraints and could be forced to choose between higher-than-expected pay rises for staff or the protection of strained public services.
Elsewhere, UK house prices fell in March, according to data from lender Halifax, as uncertainty from the war in the Middle East and a rise in mortgage rates started to weigh on demand. Data published on Wednesday showed the average UK house price fell to £299,677 in March, a decline of 0.5% from the previous month. The figures suggest the UK housing market has started to slow again after a brief recovery from a dip at the end of 2025. Halifax reported month-on-month growth of 0.3% in February.
Commodity markets
In the commodity markets, Brent crude futures traded around $96 per barrel on Friday and are on track to fall over 10% for the week, after the US and Iran agreed to a two-week ceasefire. Israeli Prime Minister Benjamin Netanyahu maintained that operations in Lebanon fall outside of the scope of the US-Iran truce, although Washington has scheduled talks next week with Israel and Lebanon to address broader ceasefire negotiations.
Despite early optimism regarding the ceasefire, oil prices began rising towards the end of the week amid persistent tensions around the Strait of Hormuz, with the vital shipping lane still largely closed. US President Donald Trump warned Iran on Thursday to “stop now” if it was charging tankers to transit the strait, a move that risks undermining the two-week ceasefire agreement that was contingent on the reopening of the waterway. Shipping flows through the chokepoint, which handled about 20% of global oil supply before the war, remain severely restricted, keeping markets on edge. “Iran is doing a very poor job, dishonourable some would say, of allowing Oil to go through the Strait of Hormuz”, President Trump said in a Truth Social post.
Additionally, attacks on Saudi Arabia’s energy infrastructure have impacted its oil production capacity. The strikes have cut oil output capacity by around 600,000 barrels a day and trimmed flows through the East-West Pipeline by roughly 700,000 barrels per day, according to the Saudi Press Agency, citing a Ministry of Energy source. Iranian strikes hit a pumping station along the East-West pipeline, according to a report from the state news agency. The pipeline transports crude from processing facilities near the Persian Gulf to the Red Sea export terminal at Yanbu.
Gold prices traded around $4,760 an ounce on Friday and are set for a weekly rise, as a weaker US dollar supported bullion, while investors assessed the durability of the fragile ceasefire between the US and Iran.
Equity markets
US equity futures rose on Friday, as investors turned their attention to diplomatic talks in Islamabad this weekend, where Vice President JD Vance will lead a US delegation in discussions with Iranian officials.
In Thursday’s regular trading session, the Dow Jones Industrial Average rose 0.58%, the S&P 500 gained 0.62%, whilst the Nasdaq Composite advanced 0.83%. Minutes from the Federal Reserve’s 17-18th March meeting showed that most members of the Federal Open Market Committee fretted that a lengthy war between the US and Iran could warrant cutting interest rates to support the jobs market, while some suggested it might require raising them to counter higher prices. The debate among rate setters at the US central bank underlines the widespread economic fallout if the war in the Middle East drags on.
A tentative truce reached between the US and Iran on Tuesday has helped to calm markets, with oil prices dropping sharply on Wednesday. However, the deal remains fragile as Israeli strikes on Lebanon continue. Policymakers left interest rates on hold at the range of 3.5% to 3.75% in March for the second meeting in a row as they looked to balance concerns over risks to both sides of the central bank’s mandate to foster maximum employment and price stability.
Federal Reserve officials indicated in a set of projections released at the conclusion of the March meeting that they expected the rise in energy costs to push up the central bank’s preferred Personal Consumption Expenditures (PCE) Price index inflation rate to 2.7% by the end of the year, up from a prediction of 2.4% in December and well above the 2% target. Nevertheless, policymakers signalled in the forecasts that they were still likely to cut rates once more in 2026, though some pushed their expectations of when it would be appropriate further into the future.
The core PCE price Index in the US eased slightly to 3.0% in February, the US Bureau of Economic Analysis reported on Thursday, down from 3.1% year on year in January. On a monthly basis, the PCE Price index was up 0.4% as expected.
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