UK markets declined this week, with the FTSE 100 falling 2.1% to trade at 10,540 points at the time of writing. The Bank of England raised interest rates by a quarter point to 4% at its meeting on Thursday, and signalled it is planning at least one further increase as soon as next month, as it warned inflation will hit 5% next year.
The rate increase from the Monetary Policy Committee was its first since 2023 and comes as the energy shock unleased by the Iran war has prompted a string of central banks to lift borrowing costs. In a sign of the MPC’s concern over inflation, eight members backed the quarter-point rise, with Catherine Mann breaking ranks to vote for a half-point increase.
A new set of forecasts released by the BoE on Thursday pointed to building price pressures, with the central bank raising its inflation forecast to 4.5% in the first quarter of next year. It said inflation would hit 5% in the second quarter and, under its central projection, not return to the Bank of England’s 2% target until the third quarter of 2028. BoE governor Andrew Bailey said the inflationary pressure in the pipeline was sufficient to warrant a rate rise now, with a further increase likely as soon as December.
The MPC has for months been split over whether soaring energy costs will lead to broader and more prolonged price pressures across the economy. Relatively resilient growth has helped support the case for rate rises, with the BoE now projecting growth of 1.6% this year and 1.3% in 2027.
UK service sector growth accelerated to an eight-month high in October as a sustained recovery in new order intakes helped to boost activity. This contributed to a rise in employment for the first time in just over two years, as well as a rebound in business activity expectations to their highest since February. Service providers mostly attributed higher business activity to improving customer demand and increased order books.
Commodity markets
In commodity markets, Brent crude futures traded around $98 per barrel on Friday, and are set for a sharp decline this week, as investors weighed the future course of the US-Israeli war with Iran after President Donald Trump’s Republican Party suffered heavy losses in midterm elections this week.
The conflict with Iran, which President Trump launched alongside Israel in February, and the resulting higher fuel prices for US consumers, were major grievances for voters in Tuesday’s rout of Republicans. Markets are assessing the impact of the midterm elections on President Trump’s next steps with the Iran war, pricing in more likelihood for the war to end.
Although uncertainty remains before the new Democratic-controlled Congress takes office in January, analysts said. Hopes for a diplomatic resolution to the war emerged after Iran reportedly sent a nuclear proposal to Washington through Qatar, Reuters reported, citing a senior Iranian official. However, Iran reported three additional attacks on oil tankers in the Strait of Hormuz on Thursday, while data from the UK Maritime Trade Operations indicated that attacks on vessels were continuing at a near-record rate.
Gold traded around $4,070 per ounce on Friday and is set for a weekly rise, following a sweeping Democratic victory in the US midterm elections. Markets expect the Democrats to push for an end to the Iran conflict, which could ease inflationary pressures and reduce the likelihood of more aggressive interest rate hikes. Investors also expect a divided government to constrain President Trump’s fiscal agenda, potentially limiting further government spending and borrowing.
Equity markets
US equity futures rose on Friday after the major averages suffered their worst one-day drop since the tariff-driven market turmoil in April 2025, amid concerns that the Democrats could impose tighter regulations on the artificial intelligence sector. In Thursday’s regular session, the Dow Jones Industrial Average fell 3.44%, the S&P 500 lost 4.36% and the Nasdaq Composite declined 5.52%.
Americans delivered a crushing rebuke to Donald Trump this week, sweeping his Republican Party from power in Congress after an election dominated by anger over the economy and the spiralling cost of living. The Democrats won a majority in both the House of Representatives and the Senate, ending Republican control of both chambers and bringing a new era of divided government in Washington.
The heavy defeat for the president saw his Republican Party lose Senate seats from South and North Carolina to Iowa and Texas, where James Talarico beat Ken Paxton to become the state’s first Democrat since the late 1980’s to be elected to the upper chamber. Hakeem Jeffries, the Democratic House leader who is expected to be the chamber’s first Black speaker when the new Congress is seated in January, claimed his party’s victory was a win for the country. He said the Democrats would bring accountability to those who have visited unprecedented corruption on the country.
In a measure of voter discontent with President Trump’s first two years, Democrats made inroads deep into Republican regions, including the Midwest, where Kansas elected its first Democratic senator since 1932, as farmers and ranchers lashed out at high fuel costs and the president’s trade wars. In Michigan, progressive Abdul El-Sayed defied a well-funded campaign by the Republican Party and became the country’s first Muslim elected to the upper chamber of Congress.
Command of congress will allow Democrats to halt any legislation proposed by Trump in his final two years in office and set the stage for sweeping investigations of his administration and even family members. The result marks a sudden break after two turbulent years in US politics, which included Trump’s tariff wars on trading partners, his conflict in the Middle East, a crackdown on immigration, attacks on institutions and threats to Nato allies such as Canada and Greenland.
Investors subsequently ditched technology stocks on fears that the Democrats will hamper the development of data centres, vital infrastructure underpinning the artificial intelligence boom. The centres were a political flashpoint for voters across the US, with the Democrats vowing to slow their expansion.
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