FTSE 100 rises as inflation concerns ease despite Middle East tensions

The UK's FTSE 100 rose on Friday, outperforming several global markets amid a broader risk-off sentiment, as investors found reassurance in fresh data indicating that inflationary pressures linked to the Middle East conflict may be less severe than previously feared.

The blue-chip FTSE 100 index gained 0.45% by 12:48 pm GMT, while the mid-cap FTSE 250 remained largely unchanged as market participants assessed economic indicators, geopolitical developments, and domestic political uncertainty.

Businesses see a slower pace of price increases

Investor sentiment was supported by a survey published by the Bank of England, which showed that British businesses expect to increase prices at a slower pace over the coming year than they anticipated earlier.

According to the survey of more than 2,000 British companies, 57% of firms said they expected to raise prices in response to the energy price shock.

That figure was down seven percentage points from April, suggesting that some of the initial impact of higher energy costs linked to the conflict involving Iran has begun to ease.

The findings provided some relief to investors concerned that elevated energy prices could trigger a broader inflationary cycle across the UK economy.

Economists assess implications for monetary policy

Commenting on the survey results, Paul Dales, Chief UK Economist at Capital Economics, said: "The latest evidence appears to support our view that the weakness of the labour market will prevent the second-round inflation effects that the Bank of England fears."

Dales added: "If so, the Bank of England might stand out from the central bank crowd by not raising interest rates."

The comments highlight a growing debate over the future path of UK monetary policy as policymakers continue to balance inflation risks against signs of economic weakness.

Market participants currently expect the Bank of England to leave borrowing costs unchanged at 3.75% during its upcoming meeting.

However, traders still anticipate one or potentially two quarter-point interest rate increases later this year.

The Middle East conflict remains a key risk

Despite the improved inflation outlook, investors continued to monitor developments in the Middle East closely.

Market participants noted that an early resolution to the conflict and the reopening of the Strait of Hormuz, a vital route for global oil shipments, would be important in limiting any further economic fallout.

Meanwhile, Iran reaffirmed its support for its Lebanese ally Hezbollah and called for Israel to withdraw from southern Lebanon.

The developments underscored the challenges facing efforts to secure an interim agreement aimed at ending the broader conflict involving Washington and Tehran.

The evolving geopolitical situation remains a significant factor influencing energy markets and inflation expectations globally.

Political uncertainty adds to investor focus

Alongside economic and geopolitical concerns, investors are also navigating political uncertainty in the UK.

Earlier this week, Labour Mayor Andy Burnham indicated that he would enter any leadership contest against Prime Minister Keir Starmer if he secured victory in a local election later this month.

The comments introduced another layer of uncertainty for investors already monitoring the economic outlook and interest-rate trajectory.

Sector performance

Technology stocks led gains on Friday, rising 2.1%, while personal care shares advanced 1.7%.

In contrast, precious metal mining stocks underperformed the broader market, declining 2.2%.

The sector moves helped lift the FTSE 100, allowing the index to post gains even as investors remained cautious about geopolitical risks and the outlook for monetary policy.

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