FTSE 100 holds above 10,490 as BoE set to keep rates at 3.75%

The FTSE 100 held above 10,490 on Wednesday as traders awaited the Bank of England's interest rate decision, with inflation holding steady at 2.8%.

"May's softer-than-expected inflation data means an interest rate hold on Thursday is now nailed on," said Suren Thiru, chief economist at ICAEW.

The FTSE 100 added 63.59 points to close at 10,494.21, recovering from this month's low of 10,122. Financials and aerospace led the advance, with HSBC Holdings rising 1.8% and Rolls-Royce gaining 2.68%. The FTSE 250 slipped 0.15% to 23,326.58, underperforming its larger peers as mid-cap stocks faced pressure ahead of domestic data releases including retail sales and employment figures.

The decision comes as the US-Iran peace deal, expected to be signed Friday, has pushed Brent crude below $78 a barrel, removing a key source of inflationary pressure that had threatened to force the BoE's hand. A rate hike would have compounded the pain for mortgage holders already grappling with elevated borrowing costs.

Inflation Holds at 2.8% as Food Prices Ease

The Office for National Statistics reported the Consumer Price Index remained at 2.8% in May, defying the consensus forecast of a rise to 3%. Food and non-alcoholic beverage inflation slowed to 2.2% from 3%, with lower prices across meat, dairy and vegetables offsetting higher air fares and petrol costs.

Transport costs rose at an annual rate of 6.8%, the highest since December 2022, driven by a 24.6% jump in motor fuel prices. Still, the broader inflation picture offered the Monetary Policy Committee room to keep the base rate at 3.75% when it announces its decision Thursday. Economists polled by Reuters expect the MPC to vote 7-2 in favor of holding.

Oil Slide and Peace Deal Reshape Rate Outlook

Brent crude fell 1.35% to $77.89 a barrel, while West Texas Intermediate dropped 1.81% to $74.67, extending a decline tied to the anticipated US-Iran agreement. Lower energy costs reduce the risk that the Middle East conflict embeds inflation more broadly across the economy, a scenario the BoE had flagged in its April forecasts.

Thomas Pugh, chief economist at RSM UK, said the steady inflation print "eliminates any lingering chance of a rate hike tomorrow and will go a long way to taking a hike in July off the table as well." He added that lower oil prices remove the need to raise rates this year, though the BoE is unlikely to resume cutting until 2027.

The FTSE 100's advance was broad-based, with Endeavour Mining rising 2.9% and Convatec Group adding 2.89%. On the downside, Frasers Group fell 4.78%, BT Group dropped 2.25% and BP declined 1.36% as the oil price slide weighed on energy stocks. The broader FTSE 350 rose 0.53%, reflecting participation across financials, aerospace, healthcare and industrial companies.

Across the Atlantic, the Federal Reserve begins its two-day policy meeting Wednesday, with markets pricing a 42% probability of a rate increase by December, according to the CME FedWatch Tool. The US 10-year Treasury yield and the dollar's direction will influence global equity flows as central banks navigate the post-conflict landscape.

This article is for informational purposes only and does not constitute investment advice.