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Introduction
March saw a sharp deterioration in risk sentiment as the Middle East conflict escalated and disrupted energy supplies, leading to sharp increase in the oil price. Global equity markets ended the month sharply lower, with emerging markets broadly enduring bigger losses than developed markets. Bond markets also suffered falls as interest-rate cut expectations unwound amid concerns over higher inflation following the rapid rise in the oil price.
Economic Overview
UK
Bank of England and Interest Rates
As expected, the Bank of England (BoE) maintained its interest rate at 3.75%. However, the unanimous 9-0 vote was more conclusive than the expected 7-2 split. The BoE’s Monetary Policy Committee noted the risks of an economic slowdown that could weaken inflationary pressures, but said the bigger risk was one of higher prices, adding it “stands ready to act as necessary” to keep inflation on track for its 2% target. The BoE Governor Andrew Bailey said petrol prices were already higher and household energy bills would increase later this year if the Middle East conflict should last. The MPC said there might be more information by the time of its April meeting to better assess the situation, with a range of possibilities for how monetary policy could respond to different developments and risks.
Economic Growth
The Office for National Statistics (ONS) confirmed the UK economy grew 0.1% in both Q3 and Q4 2025. Growth in Q4 was driven by a 1.2% rise in production, led by a 4% jump in manufacturing. Services showed no growth, and construction contracted 2%. On the expenditure side, household and government spending each rose 0.1%, but business investment fell 2.5%. Exports dropped 0.7% and imports increased by the same amount. Annual growth was 1%. For the month of January, the economy stagnated, underperforming expectations, with services flat, production down 0.1%, but construction up 0.2%. Over the three months to January, growth was 0.2%, below the 0.3% forecast.
Unemployment & Labour Market Statistics
Unemployment held steady at 5.2% for the three months to January, lower than the expected rise to 5.3%. The ONS advised caution in interpreting these numbers as survey responses continue to improve. Job vacancies remained largely unchanged, with a slight drop of 6,000 to 721,000 in the three months to February.
Wage growth slowed more than expected; regular pay rose 3.8% in the three months to January, below the predicted 4% and marking the slowest pace since late 2020. Adjusted for inflation, pay grew by 0.5%. Private sector wages (excluding bonuses), a measure closely watched by the Bank of England, slipped from 3.4% to 3.3%, and public sector wage growth decreased from 7.2% to 5.9%, with ONS noting the base effect is fading in the latter. Total pay growth including bonuses was 3.9%, or 0.7% in real terms.
Inflation
The headline annual rate of UK inflation, as measured by the Consumer Price Index, was unchanged at 3% in February, matching expectations. Clothing provided the largest upward contribution, with prices rising 0.9%. Housing and utilities costs also rose at a slightly faster rate of 4.6%. However, inflation slowed for transport with the average petrol price falling between January and February, compared with an increase in 2025. There was also a slowdown in the pace of increase in the prices of food, recreation and culture and restaurants and hotels.
Core inflation, which excludes food, energy, alcohol and tobacco prices, unexpectedly rose from 3.1% to 3.2%, missing the forecasted unchanged reading. Services inflation, which the BoE views as a key measure of domestically generated inflation, fell from 4.4% to 4.3%, whilst goods inflation was unchanged at 1.6%.
US
Federal Reserve and Interest Rates
As expected, the Federal Reserve kept interest rates steady at 3.5%-3.75%. Chair Jerome Powell noted higher energy prices may temporarily increase inflation, but it’s too early to gauge the full impact. Updated forecasts showed policymakers as a group expect one 0.25% rate cut by year-end, though some individuals anticipate less easing in 2025. No rate increases are expected this year. Powell highlighted uncertainty due to the Middle East conflict and balancing inflation risks with labour market concerns. The Fed now projects year-end inflation at 2.7%, up from 2.4%, partly due to persistent tariff effects as well as the impact of higher energy prices.
Economic Growth
In its second estimate, the Commerce Department reported that economic growth in Q4 2025 slowed more sharply than previously thought. The initial estimate of 1.4% annualised growth was revised lower to 0.7%, below the forecasted unchanged reading. The economy had expanded by 4.4% in Q3. The slower pace reflected downgrades to both consumer and government spending, as well as investment and export growth. In addition, the federal government shutdown weighed on economic activity in Q4.
Inflation
US consumer prices rose at a steady pace in February, amid higher gasoline and supermarket costs. The Labor Department said the Consumer Price Index (CPI) rose by 0.3% in February, matching expectations and above the 0.2% pace in January. Gasoline prices rose 0.8% having previously declined for two consecutive months, whilst food prices were 0.4% higher. Rents also boosted inflation. For the 12 months through February, CPI rose 2.4%, matching January’s gain and in line with forecasts.
The so-called core CPI, which excludes volatile food and energy components, rose by 0.2%, slowing from the 0.3% pace in January. Used motor vehicle prices fell for a third consecutive month, whilst there was a slower pace of increase in rents. Apparel prices, which are impacted by tariffs, jumped 1.3% higher, whilst the cost of household furnishings and operations also rose. Medical care services costs were also higher. Core CPI rose by 2.5% in the 12 months through February, matching January’s increase as the calculation continued to reflect favourable base effects.
Europe
European Central Bank and Interest Rates
The European Central Bank (ECB) kept its interest rate at 2%, citing concerns that the war in the Middle East could raise inflation through higher energy prices. President Christine Lagarde said the Eurozone remains resilient, with low inflation allowing it to be “well positioned” to deal with what she called “a major shock that is unfolding”. She added that policymakers are monitoring energy and commodity markets as they affect wages, consumer behaviour, and pricing decisions.
Economic Growth
The Eurozone’s economic growth for Q4 2025 was revised slightly lower the previous estimates of 0.3% quarter-on-quarter to 0.2%. Household consumption rose by 0.4%, ahead of Q3’s 0.2%, but growth slowed in both fixed investment and public spending. Inventory changes and net trade made small negative contributions of 0.1% to growth. Among the largest Eurozone economies, Spain recorded the strongest rate of growth of 0.8%, followed by the 0.5% pace in the Netherlands. Germany and Italy each grew 0.3%, whilst France expanded by 0.2%. On a year-on-year basis, the Eurozone grew by 1.2%, also slower than the previous estimate of 1.3% whilst below the 1.4% rate in Q3.
Inflation
Annual inflation in the Eurozone unexpectedly rose from 1.7% in January to 1.9% in February, missing the forecasted unchanged reading. The increase was driven by a stronger than expected rise in services inflation, which increased to 3.4% from 3.2%. Non-energy industrial goods inflation rose from 0.4% to 0.7%. Energy prices continued to decline, although at a slower pace of 3.1% compared with 4% in January. However, the pace of price rises in food, alcohol and tobacco slowed 2.6% to 2.5%. Annual core inflation, which excludes prices for energy, food, alcohol and tobacco, rose from 2.2% to 2.4% in February.
Asia and Emerging Markets
Japan
The Bank of Japan kept its interest rate at 0.75% and maintained a tightening stance, citing rising oil prices from Middle East tensions as inflation risks. Governor Ueda highlighted more concerns about inflation than growth, with April’s economic review expected to guide future decisions.
Japan’s Q4 2025 economic growth was revised up to 1.3% from 0.2%, exceeding forecasts and rebounding from a Q3 contraction. Business investment rose by 1.3%, while private consumption increased by 0.3%. Both exports and imports stayed in contraction. Quarter-on-quarter growth reached 0.3%, matching expectations and above the preliminary 0.1%.
Market Overview
CR = Capital return; LC = Local currency
Source: Lipper for Investment Management
Past performance is not a reliable indicator of future performance
UK equities fell in March, with the mid cap FTSE 250 suffering a much larger decline than the FTSE 100. Investor sentiment was hit by surging oil prices and heightened inflation concerns. Although the FTSE 100 was more resilient, it still endured its worst monthly performance since the pandemic. However, the FTSE 100 was supported by its exposure to large energy and commodity stocks that benefited from the higher oil price. The FTSE 250 suffered from its higher weighting in interest rate sensitive and consumption-linked stocks.
US equities, as shown by the S&P 500, finished lower but outperformed other developed markets. The US was impacted by the conflict in the Middle East as well as a rotation out of mega cap tech stocks, but the energy sector delivered strong gains. European markets, as demonstrated by the FTSE World Europe ex UK Index, suffered a larger decline amid the sharp increase in energy prices, with all sectors except for energy falling whilst more cyclical areas underperformed. Japan has a heavy reliance on imported energy and this drove the Nikkei 225 Index to reverse its strong start to the year as it endured a double-digit fall.
Asian markets underperformed in extremely volatile conditions, as shown by the sharp loss in excess of 10% in the MSCI Asia ex Japan Index. There was a sharp deterioration in risk sentiment after the escalation in the Middle East and notably after Iran closed the Strait of Hormuz. Countries that rely on imported oil, such as India and South Korea, suffered notably sharp declines. Emerging markets similarly fell sharply, as shown by the loss in the broad MSCI Emerging Markets Index. Latin America’s position as a net commodity exporter provided some support with the region a relative outperformer, but the markets still finished lower.
UK government bonds (FTSE Actuaries UK Conventional Gilts Index) finished March lower, whilst also underperforming US treasuries. The UK’s greater reliance on imported oil and gas made it more vulnerable to higher prices and greater inflationary concerns, leading to the sell-off in gilts. Sterling investment-grade corporate bonds also fell.
This update is intended to be for information only and should not be taken as financial advice.
CA13445 Exp:04/2027
