March 3 (Reuters) - London's FTSE 100 fell for a second straight session on Tuesday, as investors dialled down hopes for interest-rate cuts after surging energy prices rekindled inflation worries
UK stocks log biggest drop in nearly a year on inflation fears
Market Reaction and Economic Implications
Stock Market Performance
March 3 (Reuters) - Britain's main stock indexes logged their biggest daily drop in almost a year on Tuesday, as investors dialled down their expectations for interest rate cuts as a jump in energy prices rekindled worries about a resurgence in inflation.
Brent crude gained nearly 7%, while European gas prices soared 15% after the U.S.-Israeli war on Iran halted energy exports from the Middle East.
The selloff in British stocks was broad-based, with shares of banks, miners, housebuilders and travel companies coming under pressure.
The blue-chip FTSE 100 index dropped 2.8% and the midcap FTSE 250 index fell 3.1%, recording their steepest one-day falls in nearly a year.
Government and Economic Outlook
Finance Minister's Response
British finance minister Rachel Reeves said she would steer the country's economy through the volatility unleashed by conflict in the Middle East, raising the prospect of closer ties with the European Union and promising stability for businesses.
Growth Projections
Britain's independent budget forecasters cut their economic growth projection for this year to 1.1%, from a previous estimate of 1.4%, while revising up growth slightly for both of the next two years to 1.6%.
The statement was very much the low-key update the government had promised, said David Rees, head of global economics at Schroders.
Expert Commentary
"If higher energy prices squeeze real incomes and prevent the Bank from cutting rates, hopes would be dashed for a growth pick-up in the months ahead. That, in turn, could ultimately force the chancellor into action when fiscal watchers reconvene later this year – particularly if the recent increase in gilt yields continues," Rees added.
Interest Rates and Bond Yields
British government bond yields leapt for a second day as investors slashed their bets on Bank of England rate cuts amid mounting concerns that the Middle East conflict could add to inflationary pressures.
Traders were pricing in less than a one-in-three chance of a quarter-point BoE rate cut this month, a steep drop from the roughly 80% seen late last week.
Stock Movers
Among stock movers, Smith & Nephew gained 3.6% after Barclays raised its price target on the medical products maker.
IAG dropped 5.4%, tracking a wider decline in carriers as fuel prices jumped and Middle East travel disruptions persisted for a fourth day.
(Reporting by Medha Singh and Sruthi Shankar in Bengaluru; Editing by Shilpi Majumdar and Alex Richardson)
