FTSE 100 rallies on hopes Iran warfare will finish quickly; meals inflation to succeed in 9% – MARKETS LIVE

The Bank of England Governor has said markets are still getting ahead of themselves by pricing in interest rate hikes this year amid the Iran war.

In an interview with Reuters, Andrew Bailey said it will look at the conflict’s impact on growth and jobs as well as rates when making the decision.

He said: ‘We will have to, obviously, act on monetary policy if we think it’s appropriate to do so. But it strikes me, and it still strikes me today, that the most important thing to do is to tackle the source of the shock.’

‘Of course, we have to deal with the shocks that come our way. But our remit is very clear on this that … we have to do so in a way that … causes the least damage in terms of activity in the economy and in terms of jobs.’

Markets have priced in two rate hikes this year, while economists say that the central bank is more likely to hold rates.

‘[It] is still pricing us to raise rates. I would still say that is a judgment markets have to make but I think they’re getting ahead of themselves,’ Bailey said.

Bond markets were unmoved after his remarks.

The central bank has warned of the potential for ‘intense volatility’ in markets amid the Iran war, as it weighs on growth and pushes up inflation.

In a quarterly update, the BoE pointed to a worsening outlook for global bond markets and private credit, which had already faced souring sentiment before the war.

And it said that mortgage payments for 5.2million borrowers – or three in five households – are likely to increase between now and the end of 2028.

The FTSE 100 is up nearly 200 points at lunchtime and is now trading back at levels seen nearly two weeks ago.

Manufacturers saw a steep rise in costs in March as the Iran war put an end to the industry’s tentative recovery.

Manufacturing output contracted for the first time in six months in March, as the war disrupted supply chains.

The monthly PMI data came in at 51 last month, down from 51.7 in February, where readings above 50 signal growth.

However, the output index of the PMI data dipped to 49.2, from 52.5, and the first below-50 reading since last September.

Production and employment across manufacturers contracted over March, while average input costs rose at the quickest pace since October 2022, reflecting the spike in energy costs.

The seasonally-adjusted Input Prices Index – which measures the cost of materials and fuel – rose by 15 points month-on-month, its biggest gain since the month following Black Wednesday in 1992.

Rob Dobson, director at S&P Global Market Intelligence said: ‘The impact of the war also caused noticeable shifts in the cost and supply chain backdrops.

‘Delivery times lengthened to the greatest extent since mid-2022, while the acceleration in input price inflation was the steepest since the aftermath of the UK’s withdrawal from the ERM in 1992.

The resulting high-cost environment and shortages of inputs were also factors stymieing production volumes.

‘The darker economic and geopolitical backdrop is also weighing on business confidence and hiring trends. Optimism about the year ahead has slumped to a six month low and the latest round of job cuts is the deepest since last September.’

While Trump’s comments might have injected some much-needed optimism into markets, there has been little detail on when or how the Strait of Hormuz will reopen.

It means that disruptions to supply chains and energy markets are likely to persist, further squeezing household budgets.

The Food and Drink Federation has warned that grocery inflation could reach at least 9 per cent by the end of the year, up from the 3.2 per cent that it had forecast last September.

Dr Liliana Danila, FDF’s chief economist, said: ‘The food and drink sector is already feeling the force of this geopolitical shock.

‘As one of the UK’s energy intensive industries, manufacturers are facing mounting energy bills, rising transport and packaging costs and disruption across key supply chains.

‘These pressures are hitting simultaneously, and are a significant challenge for businesses to absorb.’

She added: ‘The current situation is unprecedented and hard to predict, however given the scale and speed of these cost increases, and despite companies’ best efforts not to pass price increases on, it’s clear that food inflation is going to rise in the months ahead.’

The FTSE is up over 160 points since the market opened as investors hope that the end of the Iran war may be in sight.

That relief was felt across bond markets, with gilt yields falling sharply as investors started to scale back their expectations for interest rate hikes.

Markets now expect one 25 basis-point increase by the end of the year and a possible second, compared with an anticipated two or three hikes previously.

Five-year gilt yields were down around 11 basis points to 4.358, while 10-year yields were down 9 basis points to 4.819 per cent.

Berkeley shares have plummeted 17 per cent to 2,838 after a sobering update to investors.

The housebuilder said it had reduced investment and halted new land acquisition as it battles higher costs and increased macroeconomic volatility. It highlighted the ‘unprecedented increase in cost and regulation’.

Chris Beauchamp, chief analyst at IG said: ‘The warnings about the UK economy continue to filter through, Berkeley being the latest to sound the alarm.

‘While it remains on track to hit targets, the move to reduce investment and halt new land acquisition is a sign of a company pulling up the drawbridge to await better times. While sensible, it has given investors a new reason to abandon the shares, sending them to a decade low in early trading.’

Retailer Topps Tiles has plunged more than 8 per cent this morning after it announced plans to close 23 of its stores.

It said it would help to ‘offset government and macro-driven cost inflation’ and a softer DIY market.

London’s blue-chip index has opened up 1.08 per cent, or 110 points, to 10,287, on optimism that the Iran war will end soon.

The FTSE closed 48 points higher on Tuesday, and is up just over 2 per cent in the year-to-date.

Brent crude is hovering at $100 a barrel once more.