The FTSE 100 rate fears slide gripped London’s markets on Friday, with the index closing down 157 points, or 1.5%, at 10,659.13 as rising bond yields reignited concerns that stubbornly high inflation will keep interest rates elevated for longer. The selling pressure spread across asset classes, with gilt yields surging and shares in some of the index’s biggest names taking heavy losses.
Bond yields move inversely to bond prices: when investors sell bonds, yields rise, and higher yields make borrowing more expensive across the economy, squeezing company profits and consumer spending alike.
Central banks fan the flames of FTSE 100 rate fears
The session was shaped by a busy week for central bank decisions. The Bank of Japan raised its policy rate by 25 basis points to 1.25%, its highest level since April 1995, according to Trading Economics. That move followed the US Federal Reserve’s rate action earlier in the week. The Bank of England, by contrast, held rates on Thursday, although analysts are now questioning how long that pause will last.
What makes the BoJ decision stand out is its pace. The hike came just three months after the bank’s previous increase, the shortest interval between consecutive rate rises since 1990. Yet the decision was not unanimous: policymakers Toichiro Asada and Ayano Sato dissented, voting against the increase. ING analyst Frantisek Taborsky said that split could make it harder for policymakers to agree on further tightening in future meetings. Deutsche Bank described the outcome as a “more dovish hike than expected”, adding that the two high-profile dissenters may point to less political support for continued rate increases than previously assumed.
Despite the rate rise, the yen weakened against the dollar, which traded at 157.07 yen, up from 155.80 yen on Thursday. The bank reiterated it would continue lifting rates if the economy and inflation developed in line with its forecasts. Trading Economics notes that analysts are forecasting Japanese price growth to approach 3% by early next year, which may sustain pressure for further action regardless of the dissent.
UK gilt yields rise sharply as Bank of England hold is questioned
In the UK, the yield on 10-year gilts climbed to 5.31%, up from 5.21% on Thursday. The US 10-year Treasury yield stood at 5.01%, up from 4.95%, while the 30-year Treasury was quoted at 5.34%.
Panmure Liberum analyst Simon French revised his expectations for UK interest rates, moving from a forecast of no change over the next 12 months to predicting 25 basis point increases at both the November and February Monetary Policy Committee meetings. “If this comes to pass the MPC will be reluctant hikers of UK interest rates, but with household energy prices on track to rise 25% in January there is a growing risk of second order impacts to consumer prices,” he said. RBC Capital Markets also revised its forecast for the Bank of England, adding a 25 basis point hike at November’s meeting.
Higher oil prices are adding to those inflation worries. Brent crude was quoted at $104.37 a barrel in London on Friday, up from $103.65 on Thursday. Morgan Stanley pointed out that “a higher expected path for oil prices means disinflation will be slower, and more restrictive policy also weighs on growth in 2027.”
One piece of better news came from the Office for National Statistics, which showed UK retail sales volumes rose 0.5% month-on-month in August, reversing a 0.5% decline in July and outperforming the 0.2% fall that markets had expected, according to FXStreet. The pound firmed slightly to $1.3372, up from $1.3356 on Thursday, and to 1.1661 euros from 1.1627.
Across Europe, the Cac 40 in Paris and the Dax 40 in Frankfurt both fell 1.6%. In New York, the Dow Jones was down 0.4% at London’s close, with the S&P 500 easing 0.1% and the Nasdaq Composite slipping modestly. The session also coincided with quarterly “triple witching”, where derivatives contracts tied to stocks, index options and futures mature simultaneously, adding to volumes and short-term price swings.
On the FTSE 100, the heaviest faller was Airtel Africa, down 11%, after Bloomberg reported that its Airtel Money arm is considering raising at least $800 million in a planned London Stock Exchange initial public offering (IPO), well below the previously targeted $1.50 billion to $2.00 billion. The mobile money business is also weighing a valuation of $8.00 billion to $9.00 billion, reduced from the $10.00 billion previously sought following investor feedback. Airtel Money could file for the IPO as early as next week, with trading targeted to begin in October. Entain dropped 5.2% on its final day in the FTSE 100 before demotion to the FTSE 250, while Glencore fell 4.0% after the Financial Times reported the miner had suspended Peter Hill, its head of steelmaking raw materials, pending a review into its business with iron ore trader Radiant World. IG Group bucked the trend, rising 2.1% after UBS reiterated a “buy” rating.
For the week as a whole, the FTSE 100 ended up 0.1%, the FTSE 250 gained 1.0%, and the AIM all-share rose 0.8%. Monday brings a Chinese interest rate decision and full-year results from Craneware and Getech; Japanese markets will be closed for Respect for the Aged Day.
