UK markets pulled back further this week, with the FTSE 100 Index falling 0.8% to trade at 10,320 points at the time of writing.
The Bank of England held interest rates at 3.75% but signalled it may need to increase borrowing costs if the Iran war energy shock continues to batter the global economy and feeds into wider UK inflation. The Monetary Policy Committee voted eight to one to keep the UK central bank’s key rate unchanged for the third consecutive meeting.
Huw Pill, the Bank of England’s chief economist, backed an immediate quarter-point rate rise to mitigate upside risks to price stability, according to minutes of the meeting. The Bank of England was forced to ditch its previous plans to continue lowering rates in March, as the US-Israeli attacks on Iran prompted the effective closure of the Strait of Hormuz and sent oil prices surging. Central bankers are increasingly fearful that the prolonged disruption to energy supplies will feed into wider wage and price setting.
Given the uncertainty about the outlook for the Middle East conflict, the Bank of England ditched its customary central forecast and set out three scenarios for how the impact of the war might pan out. The middle one, Scenario B, points to “higher and more persistent” energy costs and implies there may need to be at least two increases in interest rates in the coming year to bring inflation back to target.
However, Governor Andrew Bailey suggested the tightening in financial markets since the Bank of England’s March meeting may already be sufficient to keep inflation in check. In any of the central bank’s three scenarios, households’ post-tax income will be 0.5% lower in real terms by the middle of 2026 than a year ago. By the end of the year, food prices could be as much as 6-7% higher, hitting the poorest hardest as they spend a bigger share of their income on essentials.
Despite the negative forecasts, improvements in household finances helped push up UK house prices more than expected in April, even with mortgage rates rising, according to data from lender Nationwide. Prices rose 0.4% month on month in April, following a 0.9% increase in the previous month, taking the average house cost to £278,880. House prices rose at an annual rate of 3%, up from 2.2% in March. The figures were stronger than the 0.3% month on month decline and the 2.2% annual growth forecast by economists polled by Reuters.
Elsewhere, US President Donald Trump said he would lift tariffs on whisky from the UK, “in honour” of King Charles III, providing a moment of transatlantic trade co-operation even as the broader relationship sours over the Iran war.
Commodity markets
In the commodity markets, Brent crude futures traded around $111 per barrel on Friday and are set for a weekly rise, after a volatile week that saw the Brent crude contract for June hit a four-year high before retreating.
The June contract, which expired on Thursday, climbed to $126.41 a barrel, before settling at $114.01. The moves come as President Trump faces a 60-day deadline under the War Powers Resolution related to military action in the Iran war. Under the 1973 law, a President must withdraw troops within 60 days of notifying Congress of their deployment, unless lawmakers authorise the military action. Congress has not done so.
The Trump administration argued on Friday that the ceasefire reached three weeks ago had “terminated” hostilities between the two sides. This would allow the White House to avoid seeking Congressional approval for the war. An administration official said that the absence of direct fire between US forces and Iran since a ceasefire was first agreed to on April 7th means the 60-day clock no longer applies.
The US and Israel launched strikes on Iran on the 28th February, and Trump formally notified Congress on the 2nd March, starting the 60-day clock and setting up a May 1st deadline. Trump could seek a 30-day extension under the law but has not done so, according to lawmakers. Tensions remain elevated despite a ceasefire. President Trump escalated threats against Tehran on Wednesday, vowing to maintain the US blockade on Iran until it agrees to a nuclear deal. Iranian officials refused to reopen the Strait of Hormuz unless the US lifts its blockade.
Gold prices traded around $4,575 an ounce on Friday and are on track for another weekly fall, pressured by higher oil prices that have stoked inflation concerns and reinforced expectations of higher-for-longer interest rates.
Equity markets
US equity futures were mixed on Friday, following a robust rally in the previous session, with the S&P 500 and Nasdaq Composite reaching fresh record highs and posting their strongest monthly gains since 2020.
In Thursday’s regular trading session, the Dow Jones Industrial Average rose 1.62%, the S&P 500 gained 1.02%, whilst the Nasdaq Composite advanced 0.89%. The advance was fuelled by a solid earnings season, which helped offset persistent concerns over the prolonged US-Iran conflict. The US economy grew at an annualised rate of 2% in the first quarter of 2026, an increase from the 0.5% growth rate in the final quarter of last year but below the 2.2% predicted in a Bloomberg poll of economists.
Private investment soared at an 8.7% annualised rate in the first quarter of 2026 as businesses rushed to buy equipment used in data centres at the heart of the artificial intelligence boom, according to data from the Bureau of Economic Analysis. The investments contributed nearly 1.5% to the overall 2% growth rate, helping push it well above the 0.5% pace in the final three months of 2025. The latest earnings reports released this week from the technology giants that dominate the investment landscape suggest artificial intelligence is likely to continue boosting growth in the coming quarters as companies borrow heavily to purchase chips and build vast data centres around the US.
Growth in US consumer spending, one of the main engines of the nation’s economy, cooled to a 1.6% annual rate in the first quarter from 1.9% in the final three months of 2025. Trade was a drag on GDP in the first quarter, with imports rising quicker than exports, as businesses continued to grapple with frequent swings in Trump’s tariff policies.
The Federal Reserve’s rate setting Federal Open Market Committee voted to hold the benchmark funds rate in a range between 3.5%-3.75% at its meeting on Wednesday, after what was expected to be Jerome Powell’s final meeting as chair. However, the decision was the most divided since 1992, with eight officials voting to hold rates in their current range and four dissenting. Three officials took issue with the Federal Reserve’s bias towards easing rates, and one voted for a rate cut.
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