Uncertainties hang over financial markets


Confidence continues to deteriorate

Concerns over inflation and the outlook for monetary policy and economic growth continued to preoccupy investors in May. The FTSE 100 Index  edged up by 0.8% over the month, while the FTSE 250 Index fell by 1.4%. Consumer confidence fell to its lowest level since at least 1974 during May, according to a survey undertaken by GfK.

Energy costs drive up inflation

Although the UK economy  grew by 0.8% during the first three months of the year, it contracted by 0.1% during March as the cost of living continued to rise. The UK’s rate of inflation  surged from 7% in March year on year to 9% in April as higher energy costs took effect. The Government  subsequently announced a package of measures worth £15 billion in a bid to alleviate the impact of higher energy bills, including universal discount of £400 on energy bills. The measures will be financed partly by a 25% windfall tax on the profits of energy firms.

Labour market conundrum

Wage increases  are failing to keep up with inflation: average pay (excluding bonuses) increased by only 4.2% during the first quarter. Meanwhile, the rate of unemployment declined to 3.7% during the first three months of 2022 and, for the first time on record, the number of unemployed people in the UK was outstripped by the number of vacancies.

BoE tightens again

The Bank of England (BoE)   raised its key interest rate by 25 basis points to 1% during May, bringing it to a level  last seen in 2009. Against a backdrop of intensifying inflationary pressures, central banks around the world have announced more than 60 increases in key interest rates over the past three months, according to analysis undertaken by the Financial Times , representing the largest number since the beginning of 2000.

BoE Governor warns of uncertainty

Bank of England Governor Andrew Bailey  warned that the prospect of further food price increases is a “major worry” for the UK and other countries around the world. He believes that a “very big income shock” caused by rising prices is set to curb demand and push up unemployment and will have a more significant impact than higher interest rates. In his statement to the Treasury Select Committee, Mr Bailey apologised for sounding “apocalyptic”, but said: “There is a lot of uncertainty around this situation”.