Bank of England raises interest rates for first time in three years
The Nasdaq Composite plunged 1.2pc to 25,427.44 at the open on Wall Street, while the benchmark S&P 500 fell 0.4pc to 7,654.89.
The Dow Jones Industrial Average rose 0.5pc to 53,595.12 as investors switched out of tech stocks into more traditional sectors, over fears the Democrats would limit expansion of AI companies.
02:23pm
Traders ‘too aggressive’ on future interest rates
Traders expect too many interest rate rises from the Bank of England over the next year, an investment manager has warned.
April LaRusse, co-head of client portfolio management at BNY Investments, said money markets were anticipating too many further rate rises.
Traders are betting that the Bank will raise rates to 4.75pc by the end of next summer.
She said: “While we believe today’s increase was important in reinforcing the Bank’s inflation-fighting credibility, markets may now be somewhat too aggressive in the scale of further tightening they are pricing.
“Growth continues to benefit from strong business investment, particularly around AI-related infrastructure, but beyond this area we expect the economy to soften through 2027.
“Against that backdrop, the hurdle for further rate increases is likely to rise after the initial few hikes.”
02:11pm
‘Who are they kidding on food prices?’
Telegraph readers said inflation feels much more severe than the Bank of England’s forecasts of around 5pc in the early months of next year.
Here are some views from the comments section below and you can join the debate here.
01:57pm
Households face ‘clear risk’ of second rate rise before Christmas
Households face a “clear risk” that the Bank of England will raise interest rates in December after putting up borrowing costs for the first time in three years on Thursday.
Sanjay Raja, chief UK economist at Deutsche Bank, said the “balance of risks has shifted” in favour of higher inflation, after policymakers forecast prices could rise at an annual pace of around 5pc early next year.
He said the latest rate rise was an “insurance policy” against the risk of inflation rising further and said he did not expect several increases in the future.
But he warned: “The bigger question from today’s decision is whether the next hike comes in December or February.
“There is a clear risk that the MPC could go earlier – this will be something to watch in the coming weeks and will likely be determined by forthcoming inflation outturns as well as developments in the Middle East (with the last 48 hours delivering some good news on energy price expectations).”
01:47pm
Bailey hopes for more information on Iran war by December
Andrew Bailey, coming towards the end of his press conference, said he hopes there will be more information on whether the Iran war will end by the Bank of England’s next meeting in December.
Answering a question from Telegraph economics editor Szu Ping Chan, he said: “We will judge this at each meeting.
“We will inevitably have more information by December because we will get more data releases and so on.
“I hope we will also have more information on where this conflict is going to. That would be the most important thing.”
01:34pm
Bailey ‘sees case’ for second rate rise
Andrew Bailey said he “could see the case” for a further quarter point increase in interest rates to 4.25pc if the Middle East war is not resolved.
The Governor also said he would not sign up to suggestions that households faced just two rate rises as a result of the war.
“I’m not going to sign up to the two-and-done point,” he said.
Any further increase in interest rates would come down to “risk judgement”.
He said: “Things have happened in the last 48 hours but the whole situation is so volatile that we really don’t want to put much weight on two days, which frankly haven’t yet been backed by any firm evidence that there is a peace process which is going to lead to something concrete.”
01:24pm
Traders bet on second rate rise before Christmas
Traders are betting it is a coin toss whether the Bank of England will raise interest rates for a second time before Christmas.
Money markets suggest there is a 53pc chance policymakers will vote for the Bank Rate to be lifted for a second meeting in a row to 4.25pc in December.
Traders had given a second rate rise this year a 30pc chance before the Bank announced it was raising rates from 3.75pc to 4pc.
However, they increased bets on higher rates after Andrew Bailey, the Governor, said there was a “strong” case for a second rate rise if the Iran war was not brought to an end.
01:22pm
Tories urge Healey to cut taxes after rate rise
John Healey has been urged to cut benefits and lower taxes after inflation rose to 4pc.
Andrew Griffith, the shadow chancellor, said: “Rising interest rates are another headwind for hardworking families to deal with.
“They mean higher mortgage costs, and with the independent OBR confirming that living standards will fall next year, it’s time Labour cut taxes, welfare spending and costly regulations to make life cheaper for families.”
“The tax burden is expected to hit a record high in the wake of Mr Healey’s first Budget last week.”
01:18pm
Bailey calls for end to Iran war to ease inflation pressure
Andrew Bailey called for an end to the Iran war to end the inflation pressure facing households this winter.
The Governor of the Bank of England said he was unable to tell people how high interest rates would go but said the best way to resolve price pressures in the economy was for the Middle East conflict to come to an end.
He said: “Inflation is bad for everybody… it is most difficult for those on low incomes and those struggling to find work.
“We are very conscious of the need to deal with this.
“In conditions that are as uncertain as the ones we face, I cannot give any assurances to people about where are interest rates going to go to.
“All I would come back to… and this was the same message as the Prime Minister gave yesterday, actually, which I firmly agree with, the focus must now be on dealing with this conflict, ending this conflict.
“This is heavily focused on energy. It is not yet passing through into other sectors of the economy but the risk is that it will.
“The best thing that can be done is to deal with this conflict and thereby limit the damage that can be done in terms of passing through to other parts of the economy.”
01:10pm
Governor warns ‘strong’ case for second rate rise if Iran war continues
Andrew Bailey said there was a “strong” case for a further quarter point rise in interest rates if the Iran war is not resolved soon.
The Governor said the best thing that could happen would be a resolution to the conflict in the Middle East.
He said: “Monetary policy cannot tackle the source of the problem but there are other things that can do that.”
01:07pm
Drop in oil prices would not have effected decision to raise rates, says Bailey
Andrew Bailey said the Bank of England would have raised interest rates even if the recent drop in energy prices had been in its forecasts.
He said this was due to “inflationary pressure already in the pipeline”.
The Governor added that the sharp fall in oil and gas prices was “illustrative of the volatility of the situation”.
To the extent that it is a reflection of greater hopes in the market that there will be some form of resolution of the conflict, it underlines the point that the most important thing that can happen, and the most important thing that will shape this outlook, and also shape the degree to which there will be second round effects… is what happens to energy prices and what happens to this conflict.
“I would be pretty confident in saying to you that had we known what was going to happen in the last 48 hours, the decision would still have been the same.”
01:00pm
Bailey: Recent drop in oil prices ‘positive news’
Andrew Bailey hailed the “positive news” of oil prices falling sharply this week but said inflationary pressures were already in the economy, forcing policymakers to raise interest rates for the first time in three years.
He said: “The volatility of course has been evident in the last 48 hours.
“Wholesale Brent crude oil and UK natural gas prices are down around 15pc since the start of the week, at $95 and 218p per therm, respectively.
“That’s this morning. This is positive news but there is already a significant amount of inflationary pressure in the pipeline.”
He said Ofgem’s market monitoring period was already three-quarters of the way through below the latest drop in prices, meaning inflation faced a 0.4 percentage point increase in inflation in January alone.
He added: “Our decision will act against the inflationary pressures already in the pipeline.
“Of course, if we continue to get good news on the conflict, that will reduce the risk of further inflationary pressures building.
“Whilst the Ofgem price cap for the first quarter of next year is largely now determined, we would of course in this case see lower pump prices so inflation would peak somewhat below 5pc.”
12:54pm
Trader bets on higher rates reflect ‘risk’ in markets, says Bailey
Andrew Bailey said market bets on the Bank of England raising rates to 4.75pc next year were a reflection of the risks faced by hedge funds, rather than a projection of how interest rates would turn out.
Traders are betting that the Bank will raise rates likely three more times by next summer, taking the Bank Rate to 4.75pc.
The Governor said this was a reflection of “risk” in the market, rather than an accurate projection of where rates would go.
Mr Bailey said: “Today’s move confirms a tightening which is consistent with a prolonged conflict.
“Unless progress towards resolving the conflict is made, or there is other news which softens the risk towards inflationary pressures, a further increase in Bank Rate may be warranted.”
12:48pm
Inflation could hit 6.2pc, Bank fears
Inflation could peak at 6.2pc under the Bank of England’s worst-case projections for the economy.
Under an “adverse” scenario laid out in its Monetary Policy Report, policymakers said inflation would not drop below 4pc next year.
Its central projection sees inflation rise to around 5pc before falling below the Bank’s 2pc target by the end of 2029.
12:44pm
Don’t get used to low food price inflation
Shoppers have survived the Iran war with relatively little rise in prices on the supermarket shelves, the Bank of England said, with food price inflation at just 1.3pc in September.
But do not expect it to last.
The Bank expects that rate to more than triple in the coming year, with annual price rises set to accelerate to 4.75pc by mid-2027.
The combination of high energy prices, worldwide commodities and global weather events including Europe’s hot summer and the El Nino phenomenon are expected to drive up costs.
Competition between shops, a smaller rise in the minimum wage, the fading effect of last year’s rise in employers’ National Insurance Contributions and food suppliers’ success in locking in relatively low energy prices earlier in the year all helped keep a lid on costs so far through 2026, the Bank said.
12:41pm
Bailey: AI investment driving growth
Investment in AI is boosting growth in Britain’s economy, the Governor of the Bank of England said.
Economic activity has been more resilient than expected, Andrew Bailey said, adding business investment has been “robust”.
The Bank thinks around a fifth of recent GDP growth has been driven by AI.
Mr Bailey said: “At least some part of the recent strength appears to be driven by AI investment.”
12:37pm
Firms are absorbing energy price shock, says Bailey
The Governor of the Bank of England said there was limited evidence that higher energy costs were feeding through into other parts of the UK economy.
He said so called “second-round effects” had actually been less severe than expected under its July forecasts.
He said some firms were absorbing higher costs into profit margins or cutting other costs, although their ability to do this was temporary.
He said: “Those higher energy prices are a direct result of the continuing conflict in the Middle East.”
12:33pm
Bailey: We must act to limit inflationary pressure
Andrew Bailey said the Iran war had pushed up energy prices and would push inflation up to around 5pc in the first half of next year.
At the start of a press conference at the Bank of England, the Governor said there were few signs that this price shock was feeding through to other sections of the economy, or into wage demands.
He said: “With every month that passes without a resolution to the conflict, the more inflationary pressure builds up in the pipeline.
“And we need to act to limit that.”
12:30pm
All policymakers vote for higher interest rates
Every one of the nine members of the Monetary Policy Committee voted to raise rates.
But the policymakers appears split three ways, according to their statements after the meeting.
Three members – chief economist Huw Pill and external members Catherine Mann and Megan Greene – appear to think rates are still too low already.
Ms Mann voted for a double rise to 4.25pc. Mr Pill said today’s rate rise “is unlikely to be sufficient” to quell inflation.
At the other end of the scale are Swati Dhingra and Alan Taylor, both external members.
Ms Dhingra indicated she will return to voting for rate cuts unless there is “clear evidence” firms can jack up prices, households’ spending power is rising and wage pressures are back.
The remaining four members, of the Governor and his three Deputies, indicate they are open to raising rates further, as long as there is no drop in energy markets or wider inflationary pressures.
“Without news which softens the risks to inflationary pressures, I can see the argument for a further increase in rates,” said Mr Bailey.
12:29pm
Living standards to fall for two years, warns Bank
Workers face two years of falling living standards, as inflation outpaces pay rises across both 2026 and 2027.
The Bank of England predicts real post tax labour income will fall by 0.1pc this year and 0.6pc next year. In the summer, it had forecast a rise in living standards despite the pressure from the Iran war, indicating the situation has deteriorated significantly since then.
It comes as a blow to Andy Burnham, after the Prime Minister spent the summer promising households more financial “breathing room” under his leadership.
Families are cashing in savings to afford surging living costs.
More than one-quarter of those who said they have increased spending said they have done so by drawing on their savings to do so, according to a Bank survey.
That is a greater share than reported using savings to get through the second half of 2022, when inflation peaked at 11.1pc.
12:26pm
Borrowing costs rise as Bailey warns over more rate rises
The cost of government borrowing rose after Andrew Bailey suggested more interest rate rises were on the way if the Iran war continues.
The yield on 10-year gilts, a benchmark for what the Treasury pays to borrow money, rose from 5.10pc to 5.14pc after the Governor warned the rise in rate may not be the “last increase”.
However, the Monetary Policy Committee’s report said there had not yet been knock-on effects from the rise in energy bills to other prices and wages.
The Bank said it was “not on a pre-set path” on interest rates.
12:19pm
Mortgage payments £1,500 higher than before Iran war
Donald Trump is costing British homeowners thousands of pounds, as the Bank of England predicts the Iran war will drive up mortgage interest rates for years to come.
Borrowing costs for indebted homeowners are around one percentage point higher today than they were before the US President launched the conflict at the end of February.
That is affecting new buyers and those remortgaging.
“By the end of 2029, average annual mortgage payments are projected to be… around £1,500 higher than before the conflict in the Middle East,” the Bank said in its Monetary Policy Report.
The impact has grown in recent months, with mortgage rates up around 0.6 percentage points even since July, as the disruption to energy supplies drags on.
Home sales have slowed sharply as a result, with mortgage approvals for home purchase down 8pc in the third quarter of the year compared with the previous three-month period, and house prices down 0.8pc over the summer.
12:17pm
Bailey warns of more rate rises
Andrew Bailey warned that interest rates could rise again unless there is a swift end to the Iran war.
The Governor of the Bank of England said: “Today’s increase shouldn’t be seen as the first in an inevitable long sequence of hikes.
“But, unless the conflict in the Middle East is resolved, neither does it seem to be the last increase.”
12:09pm
Healey: Iran war ‘reaching deep’ into family pockets
John Healey said he had set out plans to get costs down for families after the Bank of England raised interest rates.
The Chancellor said: “The Iran conflict is reaching deep into the pockets of families and businesses here at home.
“In my Budget I acted to give some breathing space to families and businesses. Twenty million households will get a £100 energy payment, I extended the tax cut on electricity bills and froze fuel duty.
“I also set out the course ahead to get costs down for good. That includes big changes to our energy system so Britain is better protected from global shocks in the future.”
12:06pm
Inflation heading towards 5pc, warns Bank of England
The Bank of England has raised interest rates for the first time in three years as it warned that inflation is surging towards 5pc.
Policymakers voted to raise rates to 4pc from 3.75pc on Thursday in the first increase since August 2023.
The Bank blamed the ongoing conflict in the Middle East for triggering another sharp jump in energy prices, with John Healey’s maiden Budget doing little to ease a two-year decline in household incomes.
Threadneedle Street now believes inflation will peak around 5pc by the middle of 2027, even if the economy slows sharply.
The Bank also laid bare the impact of the conflict on family finances, with Donald Trump’s war pushing up mortgage costs for the average household by £1,500.
The Ofgem energy price cap is now expected to rise by more than £400 to £2,150 in January, with the Chancellor’s £100 Budget handout doing little to mitigate the increase.
Andrew Bailey said growing price pressures from a prolonged war in the Middle East meant Thursday’s increase was unlikely to be the last.
Other members of the Monetary Policy Committee (MPC) raised the prospect of another hike before Christmas.
One member, Catherine Mann, called for an immediate 0.5 percentage point hike to 4.25pc.
12:01pm
Policymakers heavily back rate rise
Members of the Bank’s Monetary Policy Committee voted by eight votes to one in favour of putting up rates.
The only member dissenting was Catherine Mann, who voted for an even bigger half a point interest rate rise to 4.25pc in order to bring inflation in check.
12:00pm
Interest rates rise to 4pc
The Bank of England has raised interest rates for the first time in three years as it seeks to bring down rising inflation.
Members of the Monetary Policy Committee increased the Bank Rate from 3.75pc to 4pc on Thursday after the Iran war energy shock pushed UK inflation to an 11-month high.
The increase will pile more pressure on homeowners by pushing up mortgage rates, while also impacting businesses that will have to pay more to borrow.
The rate rise comes despite oil dropping nearly 20pc this week following the Democrat victory in the US midterm elections.
JD Vance, the US vice president, blamed the Iran war for the heavy Republican defeat, which traders took as a sign that the Middle East conflict may be nearing an end.
Stock markets have surged following the midterm results, with the FTSE 100 up more than 1pc in early trading on Thursday, having jumped 1.8pc on Wednesday. The mid-cap FTSE 250 has hit a record high.
11:43am
FTSE 250 hits record high despite expected rate rise
The FTSE 250 hit a record high ahead of the Bank of England’s interest rate announcement.
The mid-cap stock index, which is largely focused on the UK economy, climbed 1.1pc to 25,176.12 amid hopes falling oil prices will boost growth.
The flagship FTSE 100 rose 1.1pc as bank stocks were boosted by an expected rate rise from the Bank of England.
The US Federal Reserve and European Central Bank have already raised interest rates in a bid to avoid runaway inflation similar to the energy shock after Russia’s invasion of Ukraine in 2022.
11:33am
Borrowing costs fall ahead of rate decision
The cost of government borrowing edged lower in the lead up to the Bank of England’s interest rate announcement.
The yield on 10-year UK gilts – a benchmark for what the Treasury pays to borrow money – fell from 5.13pc to 5.10pc on Thursday.
It follows a sharp decline in the price of oil, which is easing pressure on global economies.
11:09am
Traders look for division among policymakers
One of the key things investors will pay attention to at the Bank of England is how divided policymakers are over the vote.
At the last two meetings, three of the nine members of the Monetary Policy Committee (MPC) have voted for interest rates to be lifted from 3.75pc to 4pc. Two backed a rate rise at the meeting before that.
Kallum Pickering, an economist at Peel Hunt, said anything less than a 7-2 vote in favour of a rate rise today would be seen as favouring fewer rate rises in the future.
Money markets have forecast rises to at least 4.5pc by next summer, and favour a further increase to 4.75pc by the end of next year.
Any indication that rates may rise less than this would likely push down the value of the pound and bring down the cost of government borrowing.
10:52am
Pound hits strongest level since Brexit referendum
A gauge of the strength of the pound has risen to its highest level in a decade in the lead up to an expected rise in interest rates.
The Bank of England’s pound effective exchange-rate index – which measures the strength of sterling against other major currencies – rose to its steepest level since 2016, when Britain voted to leave the European Union.
Sterling surpassed $1.35 against the dollar this week to hit its highest level since September.
The Bank of England is expected to raise interest rates for the first time in three years after stronger than expected growth figures raised the risk of spiralling price rises in the economy.
However, the pound edged down 0.1pc against the euro on Thursday to €1.199, and was last down 0.1pc versus the dollar to $1.346.
10:37am
‘Reluctant’ rate rise will be the last, says German bank
An economist at Germany’s oldest private bank said the Bank of England would deliver a “reluctant” increase to interest rates.
Andrew Wishart of Berenberg said: “Although several rate setters will vote for the hike reluctantly, developments in the real economy justify it.
“Strong economic growth and a tentative stabilisation of the labour market suggest that an interest rate hike will restrain economic activity only modestly.
“Resilient demand also raises the risk that the rise in energy prices spills over into increases in non-energy prices and wages that keep CPI inflation above 2pc year-on-year for longer.”
However, Mr Wishart expects this will be the only increase in interest rates before a drop in energy prices. Brent crude has dropped around 20pc so far this week over hopes the Iran war could soon come to an end.
Mr Wishart said: “We assume a drop in energy prices and predict a slowdown in consumer spending growth, so forecast only one rate hike from 3.75pc to 4pc.
“However, if economic activity continues to surprise us to the upside or US President Trump continues his attacks on Iran into 2027 and oil prices do not start to fall, a second rate hike in February would become more likely.”
He added: “The Bank of England’s reluctance to hike more than absolutely necessary for fear of a downturn in demand and employment will likely prevent the Bank of England from adjusting monetary policy again on December 17, at the last meeting of the year, while it waits for more evidence.”
10:18am
Construction sector slumps ahead of expected rate rise
Britain’s construction sector faces “severe headwinds” as the Bank of England prepares to raise interest rates.
In October, activity in the industry dropped at its sharpest rate since June as higher borrowing costs hit the housebuilding sector, according to the closely watched S&P Global UK Construction PMI.
The survey of industry bosses showed residential construction suffered its worst month this year amid weakening consumer confidence and fears of higher interest rates.
Tim Moore, economics director at S&P Global Market Intelligence, said: “Construction companies commented on severe
headwinds in the house building sector from rising borrowing costs, weak consumer confidence and elevated economic uncertainty.
“Faced with rising input price inflation, higher borrowing costs and reduced order books, construction firms were unsurprisingly cautious about the year ahead business outlook.
“The degree of optimism towards activity growth eased again in October and now sits at one of the lowest levels since the end of 2022.”
09:54am
Rates to rise after growth surprise
Interest rates will be put up as a result of stronger than expected growth in Britain’s economy, according to bond trading giant Pimco.
Peder Beck-Friis, an economist at the investment manager, said the Bank would raise rates after the economy grew unexpectedly in August, having been predicted to shrink as a result of the energy price shock from the Iran war.
He said: “Growth has been resilient, the labour market has stabilized, and core inflation has edged higher.
“However, the economy does not look overheated, and pass-through from higher energy prices into core inflation has been modest overall.
“The policy outlook remains uncertain and will depend heavily on energy prices. In our baseline, we expect one final hike in February followed by a prolonged hold. Without strong second-round effects on core inflation, we see this tightening as a risk-management calibration.”
09:38am
How the Bank of England is strangling the economy
Banks put on a brave face last week as they were subject to yet another windfall tax by the Government, this time to pay for emergency energy bills.
But tucked away in the Budget was a rare bit of good news. In a letter, John Healey, the Chancellor, signalled that the Treasury was prepared to back calls from industry to unpick a series of post-financial-crisis rules that banks say are holding back the economy.
In the note, Healey reflected the arguments bank bosses have long made: that a complex web of rules devised by the Bank of England are unfairly penalising British banks, strangling lending to households and businesses.
09:17am
Oil prices plunge after midterms
The Bank of England is expected to raise interest rates today after the Iran war pushed up oil and gas prices, triggering a surge in inflaiton.
Ironically, it will do so against a backdrop of dramatically falling oil prices.
Brent crude, the international benchmark, has plunged around 20pc this week after the Democrat victory in the midterms, which has raised hopes that there may be an imminent end to the conflict in the Middle East.
The midterms result has also raised the prospect of a slowdown in AI development, which could ease the pressure on bond markets as tech giants borrow less money to fund data centre construction.
Mohit Kumar, an economist at Jefferies, said: “If oil prices come lower and some concerns over the hyperscaler issuance crowding out ease, we see the environment as supportive for rates and the central banks.”
Brent crude was last up 0.8pc on the day at more than $95 a barrel. It touched $118 on Friday.
08:54am
‘Little evidence’ of persistent inflation, says bank
The Bank of England will be raising interest rates despite there being “little evidence” so far that the Iran war energy shock risks an inflation spiral, an investment bank said.
Peel Hunt said data had not shown that the Middle East war risks a “persistent” rise in inflation.
Economists and policymakers are concerned that higher energy prices will raise the cost of living, forcing workers to demand higher wages, triggering a spiral in wage and price rises.
However, Kallum Pickering, the bank’s chief economist, said there had not been evidence that these so-called “second-round effects” of inflation were coming to pass.
He said: “If the Bank hikes, and markets put a 95pc chance on that outcome, policymakers will be acting ahead of the evidence, not on it, in our view.”
He also said there could be a sharp fall in the cost of government borrowing after the Bank’s meeting, if policymakers signal that money markets expect too many rate rises.
Traders are betting policymakers will raise rates from 3.75pc now to at least 4.5pc by next summer.
Mr Pickering said: “A meeting which produces a hike could in the end coincide with a re-appraisal towards fewer than the around four hikes currently priced into money markets over the next year.”
08:33am
European stocks jump as Vance talks down oil
European shares opened higher after JD Vance clashed with Donald Trump over the Iran war, blaming the conflict for the loss of the midterm elections.
Mr Vance argued the war was not worth losing the House of Representatives and the Senate, distancing himself from Mr Trump in a first move towards a possible 2028 White House run.
It sent the price of oil plummeting to $95 a barrel on Thursday, having touched $118 at the end of last week. The decline in oil boosted stocks and sent the cost of government borrowing down sharply.
The Cac 40 in France rose 1.2pc and the Dax in Germany climbed 0.4pc.
However, technology stocks came under pressure, with ASML down 2.7pc and Soitec off 4.5pc, tracking declines in Asia, over concerns that increased scrutiny by Democrats could slow down AI build-out in the US.
Germany’s Rheinmetall slid 14pc after cutting its 2026 sales forecast for the second time in three months, saying it no longer expected a contract award this year for the country’s Arminius Boxer vehicle programme.
08:09am
UK stocks rise as borrowing costs fall
The FTSE 100 rose at the start of trading amid a wider fall in the cost of borrowing triggered by the US midterm elections.
The UK’s flagship stock index rose 1pc to 10,931.82 at the open as it benefited from a wider drop in bond yields, which means borrowers can offer lower returns to investors when trying to raise debt.
US Treasury yields have fallen sharply since the sweeping Democrat victory in the midterms, which has increased the chances of political gridlock in Washington, which would limit some of the high spending plans of Donald Trump.
Lower borrowing costs are considered good for stocks as it gives companies more money to invest in growth or return to shareholders.
The mid-cap FTSE 250 rose 0.7pc to 25,084.19.
07:53am
Interest rates poised to rise for first time in three years
The Bank of England is expected to raise interest rates for the first time in three years on Thursday in response to increasing pressure from inflation.
Traders are betting there is a 94pc chance that policymakers raise interest rates from 3.75pc to 4pc, with another two rises to 4.5pc expected by next summer.
However, many investors do not think rates will rise that far.
Alessia Berardi, head of global macroeconomics at Amundi Investment Institute, said any impact on wages from higher inflaiton would “remain contained”, despite higher inflation in the coming months.
She said: “While the market is pricing a full hiking cycle, we think that one or two moves will be enough to protect against potential further impact on the broader economy.
“Looking forward, as the energy shock fades and growth slows under tighter financial conditions, the BoE will turn to easing in the second half of 2027.”
07:38am
Good morning
Thanks for joining me. The value of the pound has risen to its highest level in two months as the Bank of England prepares to raise interest rates.
Sterling climbed 0.2pc against the dollar to nearly $1.35 on Thursday, its highest level since September.
It came as traders responded to the likelihood that the Bank of England will increase rates for the first time in three years on Thursday.
This reflects the Bank’s attempt to keep inflation under control after the Iran war energy shock pushed price rises to an 11-month high.
Typically, higher borrowing costs strengthen the pound by boosting demand for UK interest-bearing assets among foreign investors.
The pound was also buoyed by a weaker dollar after the Democrats swept to victory in the US midterms on Wednesday.
Political upheaval hit the dollar as traders bet that deadlock in Washington will lead to curbs on Donald Trump’s runaway spending.
This brought down the cost of US government borrowing, which in turn brought down the dollar.
Jim Reid, an analyst at Deutsche Bank, said: “The prospect of a divided government eased concerns about the fiscal trajectory, given it’ll now be more difficult to pass tax cuts or spending packages.” Here is what you need to know.
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What happened overnight
Oil, chip stocks and the dollar were under pressure in Asia after the Democrats swept to a series of stunning midterm election wins.
Brent crude dived nearly 9pc overnight, falling below $100 a barrel, and has dropped by about 20pc so far this week.
If sustained through to Friday’s close, it would make for the largest weekly drop in oil prices since April 2020 when US crude briefly fell into negative territory.
Tumbling energy prices encouraged a rally in bonds, which lowered yields, pulled the dollar to a one-month low of $1.1273 per euro, and helped stocks. The yield on the benchmark 10-year note fell to a two-month low and was last at 4.85pc.
Broad stock indexes climbed on the clear outcome, with the S&P 500 closing 1.6pc higher and European shares notching a two-month high, although tech stocks struggled as investors fear greater scrutiny over AI infrastructure build-out.
European stocks were on track to open 0.2pc higher, while the Nasdaq in the US fell 1pc in premarket trading, indicating investor angst over chip and data centre stocks.
Democratic data-centre opponents who campaigned, in part, on moratoriums on data centre construction won stunning victories in Texas and Georgia in a sign public opinion is shifting on AI.
South Korea’s chipmaker-heavy Kospi sank nearly 6pc and remained within a whisker of a new seven-month low. Taiwan’s benchmark index fell over 3pc, poised for an 8pc weekly decline, its worst weekly performance since April 2025.
Tech equipment suppliers dragged on the Nikkei, which fell 2pc, although the broader Topix was 0.8pc higher, underscoring the divergent market reaction to the decisive election results.