Closing summary
The Bank of England has left interest rates unchanged at 3.75% but warned that the UK may need to brace for hikes later this year, as “higher inflation is unavoidable” as a result of the war in the Middle East.
The Bank’s rate-setting monetary policy committee (MPC) voted to leave borrowing costs on hold on Thursday, with its nine-member committee split 8-1 in their decision.
Andrew Bailey, the governor of the Bank of England, said: “The war in the Middle East is causing inflation to rise again this year.”
He added that the policymakers were monitoring the global situation and its impact on the UK economy “very closely”, but that the decision to hold rates at 3.75% for now is a “reasonable place given the situation of the economy and the unpredictability of events in the Middle East”.
Financial markets are expecting a rate rise by the end of July, and another one by the end of the year.
Investec economist Sandra Horsfield explained:
The market reaction has been considerable: the market has scaled back its expectations of BoE rate hikes, now pricing in 62 basis points of rate increases by the end of this year, whereas shortly before the decision, it had priced in over 70bps of hikes.
This reflects less the policy decision today and more the message the monetary policy committee sent about how it sees policy evolving from here: the MPC did not send as strong a warning about potential future rate hikes as markets had priced in.
The European Central Bank also left interest rates unchanged as expected but discussed a rate hike “at length”.
The bank, which sets interest rates for the 21 countries that are in the eurozone, signalled mounting concerns over soaring inflation, leading to market epectations of several rate hikes this year, with the first move expected in June.
Oil prices have retreated after a 7% jump earlier. Brent crude is down 2.9% at $114.65 a barrel, after rising as high as $126.41 a barrel this morning.
Our other stories:
Thank you for reading. We’ll be back tomorrow. Take care! – JK
Updated
More thoughts on the ECB from Felix Feather, an economist at Aberdeen.
Just a month ago, markets were pricing in an 80% chance of the European Central Bank delivering a hike at today’s meeting. That chimed with the very hawkish communications key ECB officials were delivering at the time, which often drew parallels between the 2022 energy shock and today’s. But in the end, the decision to hold the deposit rate at 2% came as no surprise to either our forecasts, consensus, or market pricing, which priced an 8% change of a hike.
Certainly, the energy shock hasn’t unwound as hoped. At time of writing, brent crude prices sit above $116 a barrel.
And many of the waymarks to hiking laid out by ECB chief economist Phillip Lane have been hit. Surveyed household inflation expectations, firm selling price expectations, the PMI output prices subindex, and headline inflation have all moved sharply higher over the past month.
But weak activity data has prompted key ECB officials to soften their rhetoric for fears of impairing the demand side. We see the ECB eventually hiking this year, probably multiple times. But soft demand and tighter financial conditions could help attenuate the passthrough of higher costs to consumer prices.
Here’s some analysis from our economics editor Heather Stewart:
The message to the UK’s crisis-weary households from the Bank of England is: brace yourself for Trumpflation – and the higher interest rates it may yet take to rein it in.
Reading the Bank’s quarterly monetary policy report, it is not difficult to understand the fury Rachel Reeves expressed while in Washington this month at the “folly” of the US president’s war on Iran – its economic consequences will hit the UK hard.
As a result of the conflict and the resulting rise in oil and gas prices, the Bank reckons average mortgage repayments are to rise by £80 a month; food price inflation could hit 4.6% by the autumn; and utility bills will jump in July and remain high into the winter.
Overall inflation is now expected to peak above 3.5% by the end of this year: more than a percentage point higher than the Bank’s pre-war forecasts. In its worst-case “scenario C”, in which oil prices hit $130 a barrel and remain there for a prolonged period – alarmingly plausible given Donald Trump’s latest erratic pronouncements – inflation peaks above 6%.
In this higher oil price world, interest rates may have to be raised by more than 1.5 percentage points, to at least 5.25%.
Despite this inflation shock, monetary policymakers have opted not to raise rates yet, with the Bank’s hawkish chief economist, Huw Pill, the only dissenter on the nine-member committee. But their reasons are hardly comforting, pointing to the weakness of the UK’s battered economy in the face of this latest crisis.
The rate-setters’ main concern is not the energy price shock, which they cannot alter; but “second-round effects”, under which firms raise prices and workers negotiate pay rises, to offset higher costs, causing inflation to be embedded in the wider economy.
As for the Bank of England, financial markets are expecting a rate rise by the end of July, and another one by the end of the year.
Ruth Gregory, deputy chief economist at Capital Economics, said:
The Bank of England’s further hawkish tilt while leaving interest rates unchanged at 3.75% suggests the chances of near-term rate hikes are rising. If oil prices fall back to about $95 a barrel as in our baseline scenario, our best guess is that rates will remain at 3.75% this year.
But one or two hikes in the coming months are certainly possible, especially if energy prices stay around $115 a barrel, or rise even further.
Max Stainton, senior global macro strategist at Fidelity International, has sent us his thoughts on the ECB.
The ECB took a balanced tone as they monitor the uncertain fallout of the energy price shock, with both a hike and hold debated – but ultimately a wait and see approach was seen as justified. The decision to hold was made against the backdrop of only marginally more information relative to March with the news flow over the next six weeks providing more clarity on how the shock is playing out.
We see the ECB hiking in the near term, to lean against the inflationary impulse of higher energy prices and supply chain disruptions in order to contain potential second round effects and ensure that the ECB clearly commit to reining in inflation.
June will provide a further round of projections and scenarios, leaving them in a better position to act. Inflation expectations and forward-looking wage developments will be closely monitored going forward - with the inflation outlook for this year already likely pointing to a higher path relative to the March forecasts.
Prada Group revealed that retail sales in the Middle East slumped by more than a fifth in the first quarter of the year as the Iran conflict “weighed on both domestic and tourist spending”.
The luxury group, which owns Versace and Miu Miu as well as its namesake label, said the poor performance in the market, as well as a 6% fall in Europe and a 2% in Japan had been offset by strong growth to wholesale partners and in the Americas and the Asia Pacific region beyond Japan so that total sales rose by 3% to €1.4bn.
Patrizio Bertelli, the chairman of Prada Group, said:
We are navigating a highly complex environment, marked by persistent uncertainty and rapidly evolving geopolitical dynamics.
ECB leaves rates on hold but discussed rate hike 'at length'
The European Central Bank left interest rates unchanged as expected but discussed a rate hike “at length”.
The bank, which sets interest rates for the 21 countries that are in the eurozone, signalled mounting concerns over soaring inflation, leading to market epectations of several rate hikes this year, with the first move expected in June.
Inflation jumped to 3% this month, well above the bank’s 2% target, and is likely to rise further as the Iran war has pushed oil prices to a four-year high.
ECB president Christine Lagarde said the final decision to hold rates was unanimous but told a press conference that a possible rate hike had been discussed “at length” by policymakers.
“We made an informed decision based on as-yet insufficient information,” she said, adding that the next meeting in June would be the “right time” for a new assessment.
There is such uncertainty that we need to understand and revisit that at our next policy meeting. We are certainly moving away from our baseline
she said, referring to a scenario for an early end to the war and a limited energy shock.
Earlier, the ECB said in a statement that upside risks to inflation and downside risks to growth had both intensified.
Money markets are pricing in roughly three quarter point rate increases this year.
Some economists think the energy shock could cut as much as 0.5 percentage point off economic growth – about half of the bloc’s projected expansion in the coming year, Reuters reported.
The second quarter is already looking dismal due to the Iran war, and the currency bloc’s biggest economy, Germany, could even contract after 0.3% growth in the first quarter.
However, Lagarde said the notion of “stagflation” does not apply at the moment. “That is a term better to be parked in the 1970s,” she said in response to a question.
Updated
Thomas Ryan, North America economist at Capital Economics, said US growth was boosted by a 9.3% rebound in federal expenditure, which mostly reversed the large contraction in the previous quarter caused by the record-long government shutdown.
The modest slowdown in consumption growth to 1.6% annualised, from 1.9%, was not as bad as we had feared... The only drag came from January, when unseasonably severe winter weather hit real consumption, though this does not point to a strong rebound this quarter as the dampening effects of high gas prices on discretionary spending will be felt more.
Elsewhere, the standout was the 10% annualised gain in business investment, driven by a 17% surge in equipment spending and a 13% rise in intellectual property products spending. Strength across these two categories mostly reflect the rapid rollout of AI-related infrastructure and models.
Finally, we also learned today that the total PCE deflator surged by 0.66% month on month in March, lifted by higher gasoline prices. The core PCE deflator rose at a cooler but still-above target 0.29% month on month pace, pushing the annual rate up to 3.2%, from 3.0%.
Core inflation is moving in the wrong direction as far as the Fed is concerned, helping to explain why some regional bank presidents want the FOMC to drop its easing bias. We expect the Federal Reseve to remain on hold this year, in line with current money market pricing.
US economic growth accelerates to 2%
Meanwhile, the US economy grew at a faster rate at the start of the year, fuelled by business and consumer demand.
Gross domestic product increased an annualised 2% in the first quarter, up from 0.5% in the previous three months, according to an initial estimate from the Bureau of Economic Analysis. A prolonged federal government shutdown limited growth in the final months of 2025.
Consumer spending, which accounts for two-thirds of economic activity, increased at a better-than-expected 1.6% rate, driven by demand for services. Business spending on equipment rose 10.4%, the fastest pace in almost three years, underpinned by investment in artificial intelligence technology.
To sum up, Bank of England governor Andrew Bailey said interest rates are not necessarily going up. It will depend on the size and duration of the energy price shock and how that is affecting UK inflation and the rest of the economy.
But, interest rate hikes may well become necessary, given the rate-setting committee’s judgment that “higher inflation is unavoidable”.
European Central Bank leaves rates unchanged
The European Central Bank has kept interest rates unchanged, and noted that “the upside risks to inflation and the downside risks to growth have intensified”.
Like the Bank of England, it is charged with ensuring inflation is around 2% in the medium term. The ECB said in a statement:
The war in the Middle East has led to a sharp increase in energy prices, pushing up inflation and weighing on economic sentiment. The implications of the war for medium-term inflation and economic activity will depend on the intensity and duration of the energy price shock and the scale of its indirect and second-round effects. The longer the war continues and the longer energy prices remain high, the stronger is the likely impact on broader inflation and the economy.
Asked whether interest rates are definitely going up, the Bank of England governor said the most benign scenario A “is not there for decoration”.
I would very much give the message: no, it is not the case that we’re giving some sort of slightly clandestine message that interest rates are going to go up, notwithstanding what we’ve decided today. As I said earlier, today is an active hold in that sense.
Earlier, he said:
It’s not a passive wait and see hold. It’s a deliberately active hold.
So I can’t give you a cast iron assurance that therefore there will be no [interest rate] increase in any scenario or any of those scenarios. But what I can say to you is that there is a good deal of space available to accommodate that.
Updated
He said one element in scenario B is more plausible than in scenario A, the energy price profile, because of the damage done to energy infrastructure in Qatar where “it’s going to take a while to repair that”.
Andrew Bailey said the Bank did not put probabilities on the three different scenarios because things move around too much.
In all three scenarios, inflation is expected to rise, and unemployment will go up to at least 5.5%.
In the worst-case scenario C, oil prices peak at $130 a barrel and remain at this level for a prolonged period, pushing inflation to a peak of 6.2% in the first three months of 2027. This would prompt the Bank to raise interest rates to 5.25%.
In the more benevolent scenario A, oil peaks at $108 a barrel this year before falling to below $80 at the start of 2027 and to $72 by the end of 2028. In scenario B, oil prices also peak at $108 but remain higher over a longer period.
He summed up the Bank’s thinking:
The MPC’s decision to hold bank rate today is based on two key judgments. First, the continued weakness in activity and the labor market is likely to lessen the strength of second round effects from higher global energy prices, but these effects are likely to be stronger. The larger and more persistent is the rise in global energy prices.
Second, that uncertainty about the strength of second round effects means that monetary policy needs to balance the costs of leaning too little against these effects, against the costs of responding to much.
The… balance is likely to change depending on how events unfold. The situation remains highly uncertain. We will continue to monitor the situation in the Middle East and how it affects the UK economy and inflation very closely.
This includes the size and duration of the energy price shock and its direct effects on UK inflation. It includes the state of the UK economy, and how higher costs of energy and other inputs to production pass through to consumer prices, and it includes the potential for second round effects of our wage and price setting.
The monetary policy committee has considered three scenarios for possible outcomes for the UK economy and inflation over the next three years, Andrew Bailey said.
The central bank’s statement issued at noon set these out:
In Scenario A, energy prices were assumed to follow market futures curves, while in Scenarios B and C, these were higher and more persistent than the futures paths to varying degrees. There were no second-round effects from the latest energy shock in Scenario A. Second-round effects were incorporated in Scenarios B and C, and materially so in Scenario C.
The appropriate monetary policy response would be state-contingent. The scenarios illustrated that a more pronounced overshoot of inflation, as in Scenario C, was likely to warrant a forceful tightening in monetary policy. Given the absence of, or more modest, second-round effects in Scenarios A and B respectively, a less restrictive policy stance would be required than in Scenario C.
During the press conference, the Bank’s governor said:
Given the sheer unpredictability and drawing on the evidence from scenario B, there is a good case for holding rates now. But we must recognize that a prolonged spike in energy prices, as in scenario C, could lead to a higher bank rate, while also recognizing that a prompt end to the conflict and a reopening of the strait [of Hormuz] can take us to the more benign scenario, as in scenario A.
Updated
The central bank is also worried about so-called “second round effects” such as higher wages. The Bank of England governor said:
Second round effects could arise, for example, if a rise in inflation expectations leads workers to bargain more strongly for wage increases and firms raise wages to maintain real pay for their employees, which in turn would increase their costs and could lead them to set higher prices. Monetary policy should not look through such effects, but the size of any second round effects, in addition to the direct and indirect effects, is highly uncertain.
On the other hand, he said:
Given the state of the economy, the UK labor market has loosened and that trend has continued in recent months. This suggests that workers will be more cautious in wage bargaining. At the same time, firms may find it difficult to pass on cost increases to their customers. Given subdued demand, higher fuel and utility bills will themselves weigh on consumer demand for other goods and services through lower real incomes and weaker consumer sentiment.
Updated
The Bank of England’s press conference has begun. Andrew Bailey, the governor, is making his opening remarks.
We now project that inflation will rise to a little over 3.5% by the end of the year. This change in the inflation outlook is a direct consequence of the conflict in the Middle East.
Higher global oil and gas prices have a direct effect on UK consumer price inflation.
He said household utility bills will head higher when the energy regulator’s next price cap for the third quarter takes effect. Higher energy, and fertiliser prices are expected to push up food price inflation.
Rachel Reeves, the chancellor, said:
The war in the Middle East is not our war, but it is one we have to respond to.
Every choice I make will be about keeping costs down for families and businesses, without repeating the mistakes we’ve seen in the past that resulted in higher inflation and higher interest rates.
We entered this conflict in a stronger position because of the choices this government took to build economic stability, and we are going further to take back our energy security, backing British industry and protecting households, to build a Britain that is stronger, more resilient, and prepared for the future.
Here’s some reaction.
Matt Smith, mortgage expert at the property website Rightmove, said:
A Bank Rate hold is actually positive news today, particularly for those on a tracker mortgage, given a rate increase was on the table. It’s probably the most uncertain we’ve been about how the Bank will vote for a while and reflects how uncertain the geopolitical landscape is right now, and how up and down swap rates have been.
Despite the uncertainty, lenders have been competitive where possible with moderated rate cuts to support what is typically one of the busier points of the home-moving calendar. However, margins are tight, and if swap rates increase further, we could see some of these moderated cuts from lenders either paused or even partially rolled back. What happens next will mostly depend on how the situation in the Middle East continues to play out which, as we’ve seen, can change almost daily.
Guy Gittins, chief executive of the London estate agent Foxtons, also welcomed the decision.
Following the increase in inflation to 3.3% this month, a hold on the base rate provides a welcome degree of stability for the property market. It also gives buyers greater certainty around borrowing costs when making long-term financial decisions.
The market isn’t moving at the same pace as 2025, due to the first-quarter boost we experienced last year from the stamp duty holiday ending. When compared to 2024, we’re seeing a stable and improving landscape, with resilient buyer interest and viewing numbers at Foxtons up in April when compared to March 2026.
Updated
Bank of England warns 'higher inflation is unavoidable'
Here’s our full story:
The Bank of England has left interest rates unchanged at 3.75% but warned that the UK should brace for hikes later this year, as “higher inflation is unavoidable” as a result of the war in the Middle East.
The Bank’s rate-setting monetary policy committee (MPC) voted to leave borrowing costs on hold on Thursday, with its nine-member committee split 8-1 in their decision.
Andrew Bailey, the central bank’s governor, said:
The war in the Middle East is causing inflation to rise again this year.
He added that the policymakers were monitoring the global situation and its impact on the UK economy “very closely”, but that the decision to hold rates at 3.75% for now is a “reasonable place given the situation of the economy and the unpredictability of events in the Middle East”.
This is the Bank of England’s statement accompanying the decision to leave borrowing costs on hold:
Taking all the risks to the economic outlook into account, and recognising that the tightening in financial conditions would help to reduce inflation over time, most members preferred to maintain Bank Rate at this meeting. In reaching this judgement, there was a range of views across members.
One view was that second-round effects could be modest and offset to a degree by the risk of weaker activity. Tighter financial conditions would provide insurance against a more adverse outcome for inflation, while further evidence accumulated in the coming months and policy could be re-assessed.
Another view emphasised that material second-round effects were plausible and that tighter financial conditions could bear down on these pressures, with differing views on whether and when a tightening in monetary policy might be needed. One member [Huw Pill] judged that an increase in Bank Rate at this meeting was warranted, given the clear upward shift in risks to the lasting achievement of the inflation target.
Before the rate decision, protesters gathered outside the central bank’s base in the City, urging it not to raise interest rates.
Andrew Bailey, the Bank of England governor, said in the statement :
The increase in energy prices from conflict in the Middle East represents a supply shock. So far, this shock differs from 2022 [after Russia’s invasion of Ukraine] as the increase in energy prices has been smaller, monetary policy started more restrictive and the labour market is weaker. Pay pressures are continuing to ease gradually.
Future higher pay demands could come up against firms’ margin constraints, a softer labour market and firms’ caution about passing on cost increases. This shock will induce a trade-off between higher inflation and softer output, and the appropriate policy response is state-contingent.
If the shock appears to be short-lived or the economy weaker, policy should place relatively more weight on avoiding unnecessary contraction in activity. If second-round effects are likely to be greater, policy should focus on returning inflation back to target more quickly.
At the moment, I place most weight on Scenario B, albeit with slightly reduced second-round effects. I place some weight on Scenario C, which would require a stronger monetary policy response. For now, the softer real economy makes it appropriate to maintain Bank Rate.
Updated
Bank of England holds rates unchanged at 3.75%
The Bank of England has left interest rates unchanged at 3.75%.
The central bank’s rate-setting monetary policy committee (MPC) voted to leave borrowing costs on hold at noon, after its latest meeting.
The vote by the nine-member committee to keep rates on hold was split eight to one. The Bank’s chief economist Huw Pill voted for a rate hike to 4%.
The Bank is charged with keeping UK inflation at a target of 2% in the medium term. It has lowered interest rates six times since mid-2024, and had been expected to cut again this year before the US-Israeli war on Iran began on 28 February.
However, soaring energy costs as a result of the effective closure of the strait of Hormuz have began to push up inflation around the world.
Inflation in the UK rose to 3.3% in March, from 3% in February. Petrol and diesel prices have soared since the start of the Middle East conflict, reflecting a jump in the global oil price to above $100 a barrel.
Updated
We are moving closer to the Bank of England’s interest rate decision at noon. We are expecting no change to its main rate of 3.75%.
Water companies are leading the gains on the FTSE 100 index in London, after United Utilities laid out new investment plans.
The company forecast higher annual revenues and said it has submitted plans to regulator Ofwat for a further £1.4bn investment programme that could create 4,000 supply chain jobs.
This would support housing, data centres and clean energy development, at a time when Britain’s water sector is under mounting pressure to address pollution after numerous spills, and strengthen long-term infrastructure resilience.
Russ Mould at stockbroker AJ Bell said:
Plans for a massive flood of investment at water utility company United Utilities has created an unusual level of excitement for a part of the stock market historically seen as pretty boring.
In more recent times the water sector’s name has been mud with investors, regulators, the public and politicians thanks to issues around pollution and financial mismanagement across the broader sector.
The plan to support areas like data centres, clean energy and new homes is being taken as a game changer by investors for now, although delivering on this big programme of spending and remaining on time and on budget is the big challenge for the company.
United Utilities posted an adjusted profit after tax for the year to 31 March of £730m, up from £513.3m the year before, and said it expects evenue to rise to between £2.7bn and £2.8bn in the current year.
Chief executive Louise Beardmore said:
Operationally, we are making real progress on the issues that matter most, including significant reductions in storm overflow spills and sewer flooding, alongside strong customer service performance.
Oil prices retreat after hitting four-year highs
Brent crude has retreated, reversing earlier declines of as much as 7%, and is now trading 1.65% lower at $116.18 a barrel.
The global oil benchmark rose above $126 a barrel earlier, the highest since March 2022, after a report that Donald Trump will be briefed about military options against Iran today.
The United States is pressing ahead with plans for an international coalition to open the strait of Hormuz, according to a State Department cable seen by Reuters, as oil prices surge on fears of lengthy disruptions to global fuel supplies.
On the stock markets, the FTSE 100 index has climbed 110 points, or 1.1%, to 10,323. Germany’s Dax added 0.3%, while the French CAC index fell 0.6% and Italy’s FTSE MiB dipped slightly.
AJ Bell investment director Russ Mould has looked at this morning’s moves:
The FTSE 100 was helped by its oil and gas heavyweights but elsewhere there was heavy selling in Europe as the energy price shock threatens to intensify and with it dials up inflationary pressures across the board in the global economy.
A strong performance in emerging markets helped Unilever to beat expectations, but the robust performance merely helped the shares stand still as investors weigh what is likely to be a pretty difficult consumer backdrop.
Mining services business Weir slumped as long-serving CEO Jon Stanton announced plans to stand down. Stanton has helped to significantly reshape the business and the investor reaction implies some trepidation about Weir’s prospects under new leadership despite resilient trading.
The final meeting for Jerome Powell as Federal Reserve chair was an eventful one despite the lack of change on headline interest rates. While President Trump appointee Stephen Miran voted, as he has consistently done, for a rate cut – three other members objected to language suggesting future cuts.
Powell insisted he would stay on as a governor until 2028 after surrendering his current role and again decried interference from the Trump administration to put the spotlight on this area of market concern once again.
Updated
Volkswagen lost more than a billion euros from US tariffs and the cost of ending production of a battery vehicle in Tennessee in response to Donald Trump’s anti-electric car policies.
Germany’s biggest carmaker on Thursday reported a €500m cost of winding down production of the ID.4, an electric crossover SUV, in favour of producing a bulkier petrol SUV, the Atlas. It also said there was a €600m cost from US tariffs.
Trump’s turn against electric cars has pushed manufacturers selling to the US to U-turn on battery cars in favour of more polluting vehicles. At the same time, Volkswagen and others have been struggling with competition from Chinese manufacturers who have been able to undercut them on electric cars.
Oliver Blume, Volkswagen’s chief executive, said:
The world is undergoing fundamental change – and we are aligning our strategy consistently. Wars, geopolitical tensions, trade barriers, stricter regulations, and intense competition are creating headwinds.
The company’s response has been to plan cuts to its manufacturing footprint, and to consider giving spare factory space to Chinese manufacturers.
Arno Antlitz, Volkswagen’s chief financial officer, said:
In this environment, the planned cost reductions are not enough. We must fundamentally transform our business model and achieve structural, sustainable improvements. This includes improving the cost structure of our vehicles without compromising product substance, significantly reducing overhead costs, increasing the efficiency of our plants, and accelerating technology development and decision-making.
Eurozone grows 0.1% in first quarter; inflation rises to 3% in April
The eurozone grew by 0.1% in the first quarter, while inflation jumped to 3% in April driven by a near-11% surge in energy prices.
The EU also expanded by 0.1% between January and March, according to a flash estimate published by Eurostat, the statistical office of the European Union. In the fourth quarter of 2025, GDP increased by 0.2% in both areas.
Germany, Europe’s largest economy, grew by 0.3% as we reported earlier, while France, the second-biggest economy, showed zero growth, and Italy, the No. 3, expanded by 0.2%, and Spain, the fourth-largest economy, managed 0.6% growth.
Among the member states for which first-quarter data is available, Finland (+0.9%) recorded the highest increase, followed by Hungary (+0.8%), Estonia and Spain (both +0.6%).
Declines were recorded in Ireland (-2.0%), Lithuania (-0.4%) and Sweden (-0.2%).
Separate data showed inflation rose to 3% this month, from 2.6% in March.
Energy is estimated to have the highest annual rate in April (10.9%, compared with 5.1% in March), followed by services (3.0%, compared with 3.2% in March), food, alcohol & tobacco (2.5%, compared with 2.4% in March) and non-energy industrial goods (0.8%, compared with 0.5% in March).
Updated
China’s factories increased production for a second month in April to ship goods early to buyers worried the Iran war will drive up costs, with new export orders at their highest level in two years.
The official purchasing managers’ index for manufacturing dipped to 50.3 from 50.4 in March, but held above the 50 mark that separates growth from contraction. It was better than economists had expected.
Teh sub-index for new export orders rose to 50.3, the highest since April 2024, from 49.1 in March.
Zhiwei Zhang, chief economist at Hong Kong-based Pinpoint Asset Management, told Reuters:
It will be interesting to see if the official trade data confirm the resilience of exporters in coming months.
The outlook for the export sector is very important for China’s economy, as domestic demand has been weak.
Updated
German economy surprises with 0.3% growth in first quarter
Germany’s economy, Europe’s largest, surprised with 0.3% growth in the first three months of the year, defying the adverse impact of the Iran war – for now at least.
This was faster than the 0.2% growth seen in the fourth quarter of last year, according to official figures. This was revised down from 0.3%.
The Federal Statistical Office (Destatis) reported that both household and government spending in the first quarter were higher than in the previous quarter, while exports also rose. More details will be released next month.
Carsten Brzeski, global head of macro at ING, said:
Almost exactly one year after the new German government – under chancellor Friedrich Merz – came into office, today’s data suggests that the German economy is better than its reputation implies.
However, it would be risky to assume that today’s performance can simply be continued. The war in the Middle East and soaring energy prices, combined with a lack of structural reform and clear strategy for how to restore competitiveness, do not bode well for Germany’s growth outlook. Judging from the latest sentiment indicators, the signs of a recovery on the back of fiscal stimulus, particularly in defence and infrastructure, have started to fade away.
Soaring energy prices have again exposed the fact that Germany is one of Europe’s largest net importers of energy. Some 6% of its oil imports come from countries in the Middle East. The so-called energy-intensive industries in Germany account for some 17% of industrial gross value added and employ just under one million people. With the war in the Middle East now gradually shifting from a pure energy price shock towards an energy supply and broader supply chain shock, the German economy is once again at the centre of an exogenous, global, disruption.
But, he added:
Even if fears of another year of stagnation have returned, it should be clear that the planned investments in defence and infrastructure are still on track and should support the economy this year and beyond. The fiscal impulse is real, it just needs time to reach the real economy.
DCC shares tumble after Irish energy distributor rejects private equity takeover approach
The Irish energy distributor DCC has rejected a £4.95bn takeover proposal from US private equity groups, saying it undervalued the company.
Shares in the London-listed company, which is based in Dublin, fell 5.1% to £55.80.
The cash proposal of £58 a share from KKR and Energy Capital Partners represented a premium of 8% to DCC’s closing price before the offer was made public on Wednesday.
Under UK takeover rules, the consortium has until 10 June to make a firm offer or walk away. It is the latest private equity pursuit of a UK-listed company, with bidders attracted by British and Irish firms’ comparatively lower valuations.
Other FTSE-100 companies that have been taken over or pursued in the past few months include the insurer Beazley, the investment company Schroders and the product testing company Intertek.
Beazley, which specialises in insuring against cyber-attacks that also covers fine art and luxury yachts, in early February agreed to be taken over by bigger Swiss rival Zurich. Not long after, Schroders succumbed to a takeover by the US investor Nuveen, which ends two centuries of family ownership of the historic British asset management group – but will create one of the world’s biggest fund managers.
Intertek is being pursued by the Swedish investment company EQT, which is working on an improved proposal, according to Bloomberg News.
DCC, which distributes liquid gas, biofuels, and renewable energy to businesses and households, has been simplifying its operations to focus on its core energy business, having offloaded its healthcare and technology assets.
Analysts at RBC Capital Markets said:
We think there is a good chance that a deal happens, but are not convinced it will be much more than 10% ahead of the current price.
Updated
In Germany, unemployment rose more than expected in April, above the 3 million mark.
The jobless figure, which is adjusted for seasonal effects, increased by 20,000, according to offical figures. Economists had expected a rise of 4,000.
Andrea Nahles, head of the labour office, said:
There is still no sign of a turnaround in the labour market. The spring upturn remains weak in April as well.
Air France-KLM cuts capacity forecasts, though summer travel demand remains strong
Air France-KLM has reported a smaller first-quarter loss than expected, but is scaling back capacity because of the US-Israeli war with Iran and soaring jet fuel costs.
The Franco-Dutch carrier expects its fuel bill to rise by $2.4bn this year. Capacity (i.e. more seats) will now increase by 2% to 4% this year, rather than 3% to 5% as previously planned.
Other European airlines, including easyJet and Tui, have also revised their outlooks, and expect to feel the impact of the closure of the strait of Hormuz, which has sent energy prices soaring, more acutely in the coming months.
Air France-KLM chief executive Ben Smith said:
While fuel price increases are not yet reflected in the results we present today, they are expected to weigh on the coming quarters.
The company said it is limiting discretionary spending, including travel expenses, and has frozen hiring for non-operational staff, while continuing to recruit for operational jobs such as mechanics.
The group said its fuel hedging strategy remains in place and it is already 33% hedged for 2027.
However, it also said summer travel demand remains strong, with European destinations such as Italy and Spain popular, as travel to parts of the Middle East remains constrained.
It said it had seen an initial boost after the Iran war broke out as more people booked flights to Asia, but plans to expand its long-haul capacity gradually as people are postponing travel plans or booking closer to the date of travel.
Air France-KLM reported a first-quarter operating loss of €27m, a €301m improvement over last year.
French economy shows zero growth in Q1; Spanish GDP slows
France’s economy did not grow at all during the first quarter, with households spending less and a slump in exports.
GDP was unchanged between January and March, after 0.2% growth in the fourth quarter, according to figures from the French statistics office Insee.
Household consumption declined slightly (-0.1% after +0.4%), and investment fell back (-0.4% after +0.3%). Overall, the contribution of domestic demand (excluding inventories) to GDP growth was zero this quarter, after it added 0.4 points to fourth-quarter GDP.
The contribution of foreign trade to growth was strongly negative this quarter (-0.7 points after +0.6 points): exports fell sharply (-3.8% after +0.8%), while imports declined again (-1.7% after -0.8%).
Total production, of goods and services, was once again sluggish, rising by 0.1%, after a 0.2% gain in the previous quarter.
Meanwhile, Spain’s economic growth slowed to 0.6% in the first quarter from 0.8% expansion in the previous quarter, preliminary data from the National Statistics Institute showed. However, this was slightly better than expected.
Spain’s economy has been one of the top performers in Europe, in part thanks to record tourist numbers, and grew 2.8% last year.
The Spanish government still expects the economy to grow 2.2% this year, although it said earlier this week that uncertainty triggered by the US-Israeli war on Iran could affect the forecast.
Whitbread to cut 3,800 jobs
Premier Inn owner Whitbread is to cut about 3,800 jobs in the UK and Ireland as it resets its five-year business strategy, after tax rises and pressure from a US activist investor.
The cuts will affected about 12% of Whitbread’s 30,000-strong workforce in the UK and Ireland working in its Beefeater and Brewers Fayre restaurants, which are usually located next to or inside Premier Inn hotels. The company said consultations with affected employees would begin immediately.
Whitbread said it expected to retain a “significant proportion” of those affected and would try to find alternative roles for them, given it hires about 15,000 people each year.
Whitbread was one of the biggest fallers on the FTSE 100, down 4.4%.
The cuts come after Whitbread began a fresh review of its business in November, a year after it first announced its five-year plan, after it was hit by higher costs in the chancellor’s budget.
Britain’s largest hotel operator had already been in the process of converting some of its underperforming Beefeater and Brewers Fayre restaurants, usually located next to or inside its Premier Inn hotels, into hotel rooms.
Whitbread warned after Rachel Reeves’s 2025 budget that tax changes would cost it an additional £50m this year, amid changes to the way business rates are calculated. This came hot on the heels of an earlier cost squeeze due to higher wage bills and rising food prices.
Whitbread’s new strategy means it will become a pure hotel business, about seven years after it sold the Costa Coffee chain to soft drinks giant Coca-Cola in a near-£4bn deal.
This means that as it stands the Beefeater restaurant brand - established in 1974 in known for serving steaks and classic pub dishes – will disappear from UK high streets.
Updated
Introduction: Bank of England expected to hold interest rates as it assesses fallout from Iran war
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
The Bank of England is expected to keep interest rates on hold at noon, as policymakers assess the economic fallout from the Iran war.
Economists will be looking for any clues on future rate policy in the statement and the subsequent press conference. The nine-member rate-setting panel, led by central bank governor Andrew Bailey, could hint at rate hikes in the months ahead if the conflict in the Middle East — where a shaky ceasefire is in place — drives inflation higher.
For now, the monetary policy committee is expected to keep the bank’s main rate at 3.75%, while one or two members could vote for a quarter-point hike as a preemptive move to ward off higher inflation.
Before the US and Israel began their attacks on Iran on 28 February, the central bank had been expected to cut borrowing costs this year, as inflation was predicted to fall back toward its 2% target during the spring. The war has since upended the bank’s predictions.
Sandra Horsfield, an economist at Investec, said the “repercussions of the conflict are still keenly felt and uncertainty about how the situation could evolve also remains high”.
The European Central Bank is also set to keep rates unchanged on Thursday, but is also likely to signal that a rate hike, perhaps as soon as June, could be on the cards to tackle an energy-driven surge in consumer prices.
In the United States, the Federal Reserve on Wednesday left interest rates unchanged for the third time this year, despite Donald Trump’s insistent demands for rate cuts.
Oil prices jumped a further 7% on Thursday to the highest since March 2022, after a report that the US is considering military options against Iran to break the deadlock in stalled negotiations to end the war.
Donald Trump is set to receive a briefing today (from Centcom commander Adm. Brad Cooper) on plans for a series of military strikes on Iran to force it back to negotiations over its nuclear programme, according to a report from the US news outlet Axios.
Brent crude futures for June are now 5.3% higher at $124.58 a barrel, after hitting $126.41 a barrel earlier. On Wednesday, oil gained 6.1%. The June contract, up for a ninth day, expires on Thursday and the July contract rose 3% to $113.78 a barrel, after gaining 5.8% yesterday.
US West Texas Intermediate futures for June rose 2.3% to $109.35 a barrel, after hitting $110.93 a barrel earlier, and climbing 7% on Wednesday.
Both oil benchmarks are on track for their fourth month of gains. Brent has more than doubled since the start of the year while WTI is more than 90% higher.
Asian stock markets declined, with Japan’s Nikkei losing 1.06% and Hong Kong’s Hang Seng down 1.2%.
The Agenda
9am BST: Germany GDP for Q1
10am BST: Eurozone GDP for Q1, inflation for April
Noon BST: Bank of England interest rate decision
1.15pm BST: European Central Bank interest rate decision
1.30pm BST: US GDP for Q1
Updated
