FTSE climbs higher as BoE raises inflation forecast

·Contributor
·4-min read
The Bank of England
The Bank of England. Photo: Luke MacGregor/Reuters

The FTSE 100 (^FTSE) pushed ahead on Thursday, rising 0.5% after the Bank of England (BoE) said it expects UK consumer price index (CPI) inflation to rise to 3% in the coming months.

However, officials insisted that a surge in prices will be temporary, saying it will then drop down towards its 2% target.

"CPI inflation is expected to pick up further above the target, owing primarily to developments in energy and other commodity prices, and is likely to exceed 3% for a temporary period," the Bank said in its statement.

"More generally, the committee’s central expectation is that the economy will experience a temporary period of strong GDP growth and above-target CPI inflation, after which growth and inflation will fall back."

Read more: Bank of England leaves interest rates unchanged at 0.1%

It came as it voted unanimously to leave interest rates at record lows of 0.1%, and maintained the target stock of quantitative easing (QE) at £895bn ($1.2tn).

The Bank also estimated that the British economy is now back up to 97.5% of its pre-COVID size. It revised expectations for the level of UK GDP in 2021 Q2 by around 1.5% since the May report, as restrictions on economic activity have eased.

Output in June is expected to be around 2.5% below its pre-COVID 2019 fourth quarter level.

After the announcement, the pound fell to session lows around $1.3906 and hovered around the $1.3920 mark, whilst UK 10-year yields dropped to 0.75% from 0.78%.”

Watch: What is inflation and why is it important?

Elsewhere, the French CAC (^FCHI) rose 1.2% on the day, and the DAX (^GDAXI) was almost 0.9% higher in Germany.

Stocks were buoyed by a rise in German exports to the US and China in May. According to the latest figures from the German statistics office, shipments to the US rose almost 41% year-on-year to €9.1bn (£7.8bn, $10.9bn), while exports to China, Germany’s second-biggest market outside the EU, rose 17.7% to €8.4bn.

German business confidence also improved, and was better than expected, jumping to 101.8 in June from 99.2 in May.

Confidence among French businesses reached its highest level since mid-2007, driven by the service industries.

Across the pond, the S&P 500 (^GSPC) gained 0.6% at the time of the European close, and the tech-heavy Nasdaq (^IXIC) rose 0.9%, boosted by shares of Tesla and other technology firms. The Dow Jones (^DJI) climbed 0.7%.

It came after initial claims for jobless benefits in the US fell to 411,000 last week, from 418,000 the previous week, as the labour market recovery from the COVID-19 pandemic gains traction. This was against expectations of a drop to 380,000.

"Imprecise seasonal factors around Memorial Day holiday weekend likely contributed to the uptick in initial claims, so the rise should prove temporary," economists at Bank of America Securities in New York wrote in a note.

Claims have dropped from a record 6.149 million in early April 2020. However, they remain above the 200,000-250,000 range that is viewed as consistent with a healthy jobs market.

On Wednesday, the tech-focused Nasdaq and the Russell 2000 hit another record high, despite a fairly lacklustre session.

Read more: Nasdaq ekes out record high as tech stocks add to gains

Michael Hewson of CMC Markets said: “Last year the central bank stopped all bank buybacks and dividends to ensure the US banking system had enough to cope with the economic fallout from the various lockdowns and restrictions placed on the US economy.

“At the start of this year that rule was altered so that banks that passed the various stress test scenarios could resume this process on a limited basis.”

Shares were mixed in Asia on Thursday after a listless day of trading on Wall Street as the recent bout of nerves over Federal Reserve policy fades.

In Japan, the Nikkei (^N225) was flat while the Hang Seng (^HSI) rose 0.3% and the Shanghai Composite (000001.SS) edged slightly lower.

Watch: What are SPACs?

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