Leading Indicators | Q2: A period of adjustment, not disruption, for UK markets

Inflation shock begins to feed through, but BoE expected to keep rates on hold at 3.75% tomorrow

 
UK inflation rose to +3.3% in March, as higher energy costs linked to the Middle East conflict fed through. The increase was driven by an +8.7% rise in motor fuel prices, the largest monthly gain since the Russia - Ukraine conflict in 2022. While CPI had been expected to move back towards 2% this quarter, it is now likely to remain closer to 3% and rise further into Q3. Even so, softer labour market conditions should keep the BoE on hold at tomorrow’s MPC meeting, with the Bank Rate likely to remain at 3.75%.

Domestic uncertainty a bigger drag on UK sentiment than external shocks

The GfK Consumer Confidence Index fell to ‑25 in April, marking its third consecutive monthly decline. Sentiment has weakened on the broader economic outlook (‑43), while views on personal finances remain relatively stable (‑4). The latest decline raises the question of whether sentiment is being driven by the Middle East conflict, domestic political uncertainty, or a combination of the two. Historically, UK consumer confidence has shown greater sensitivity to domestic policy shocks, falling more sharply after the September 2022 mini‑Budget than during COVID.

Q2 insights: what are the key concerns for UK businesses?

16% of Real Estate respondents in the latest Business Insights and Conditions Survey cited energy prices and interest rates as the main concern for their business. Interest rates were already a key issue at the start of the year, with 22% identifying them as their primary concern in January, ahead of recent geopolitical developments. Despite this, market volatility continues to ease, with the VIX (the market’s fear gauge) falling to 18.4, below levels seen during last year’s tariff‑related spike. While uncertainty remains, calmer financial conditions could support a pickup in CRE investment activity later in the year, consistent with the pattern seen in 2025.