Index powers to new highs as inflation falls, defence in demand

• FTSE 100 climbs 92 points to 10,648

• BAE Systems and Glencore lead risers after results

• Inflation eases to further raise BoE rate cut hopes

Some different takes on the inflation story.

Cooling inflation seems likely to boost the likelihood of a BoE base rate cut, which would be welcome news for borrowers as mortgage rates have edged higher in the past few weeks.

Caitlyn Eastell, personal finance analyst at Moneyfacts, said: “In recent weeks, swap rates have been reacting to volatile market conditions, effectively halting lenders’ rate-cutting momentum and prompting many to reassess their margins and adjusting their pricing by increasing rates, which led to a small uptick in average rates.”

This week, swap rates hit 30-day lows following yesterday’s unemployment stats, “which means we may see lenders beginning to make rate cuts in the next few weeks”, says Eastell.

CPI may be at its lowest level for nearly a year, but that headline figure is “only part of the story”, says Stuart Morrison, research manager at the British Chambers of Commerce.

“Firms will be hoping it strengthens the case for another interest rate cut by the Bank of England soon,” he says, noting that 56% of firms cited inflation as a worry, with price pressures “squeezing confidence, stalling investment and holding back recruitment”.

He says that alongside next month’s Spring Statement from Rachel Reeves, as well as providing the economic outlook from the OBR and the government, firms want easing inflation to be “matched by action to cut the cost of doing business” such as business rates reform and support for exports. “Only then, will businesses be able to fully turbocharge economic growth.”

Trade unions also want cuts, with TUC general secretary Paul Nowak saying the easing of inflation is “welcome news for working people”, with further softening expected in coming months as the government has provided support for energy bills, rail fares and prescription charges.

“But after years of falling living standards millions of families are still struggling to make ends meet. With households squeezed there’s less money being spent on the high street – holding back businesses and choking off growth.

“The Bank of England must now act,” he says, calling for “a series of quick fire interest rate cuts” to “put money back into people’s pockets, give businesses the confidence to invest and help Britain finally move on from a cost-of-living crisis that has dragged on for far too long”.

After just over an hour of trading, the FTSE 100 is conitinuing to power higher, up over 70 points to cross above 10,625.

Several sectors are providing the juice: miners, led by Anglo American and Glencore; defence and aerospace, led by BAE Systems and Rolls-Royce; and banks, led by Barclays and Standard Chartered. 

Oil giants Shell and BP, and drug giants AstraZeneca and GSK are also on the front foot to supply extra oomph, with only two out of the index’s 15 largest names in the red currently.

Fallers are seeing the AI fear trade return with RELX, Experian, Pearson and others at the bottom of the list, along with consumer focused names like 3i Group, Diageo, Entain, BT and Unilever.

After the UK CPI data earlier, markets are pretty sure we are going to see another Bank of England interest rate cut at the meeting next month.

BAE shares rocketed back up to just below last month’s all-time high, but have eased back a little now.

Market analyst Mark Crouch at eToro says: “BAE Systems doesn’t manufacture optimism, it manufactures deterrence. And right now, deterrence is in high demand.

“A 12% rise in operating profit tells you governments aren’t hesitating in reaching for their chequebooks. BAE’s order book now stands at a record £83.6bn, stretching years into the horizon, and it’s why BAE shares have definitively outpaced the FTSE 100.

“With free cash flow set to top £6bn through 2026, that trajectory looks set to continue.”

He conceded that there’s “a bittersweet truth” to investing in defence, as the Russia-Ukraine War grinds on and tensions in the Middle East remain at boiling point.

Or, as Richard Hunter at Interactive Investor puts it: “BAE is basking in the increasing heat of geopolitical tensions with a set of results which have comfortably blown past estimates.”

He reminds that the group upped its guidance at the halfway stage, reiterated the numbers at its third quarter update and has now delivered for the full year – “and then some”.

Revenues came in at the upper end of guidance, earnings were above both market estimates and the guided growth of 9-11%, while free cash flow decreased 14% to £2.16 billion given increased investment, but over a three year period came in at more than £7 billion, higher than the previously estimated £6 billion.

This, he also recognised, reflects “the unfortunate sign of the times that defence stocks are squarely back in fashion, as governments around the world look to protect their interests and lands from growing tensions. For shareholders, however, this has resulted in significant rewards.”

The “prodigious” cash flow enabled net debt to be reduced by 22% to £3.84 billion, while the 10% dividend rise took the projected yield to 1.8% which Hunter says may be “pedestrian” but maintained a payment which has been increased for more than 20 consecutive years.

Headwinds may be few and far between, he adds, with the lack of a share buyback announcement potentially resulting in some “minor disappointment even though the rationale is sound as the group diverts resources elsewhere for investment and debt reduction purposes”.

The FTSE 100 has started Wednesday trading at new record heights, up 38 points to 10,594.

BAE is setting the pace at the front, up 5.9%, followed by defence sector peer Babcock, with Rolls-Royce a little way behind.

Miners are next, with Antofagasta, Anglo American, Glencore and Rio Tinto all up between 1% and 2.5%. Precious metals miners Fresnillo and Endeavour are also well bid.

Glencore has reported lower year-on-year earnings despite a recovery in the second half of last year, but the decline was less than City analysts had forecast.

Revenue for 2025 came in at $247.54 billion, up 7% on the previous year and ahead of estimates of $233.9 billion, while adjusted EBIT fell 14% to $5.98 billion, but beat forecasts of $5.47 billion.

Performance improved sharply in the second half, with EBITDA of $8.1 billion, up 49% on the first half, helped by stronger metals prices and higher copper output.

The FTSE 100 miner and trader proposed a base dividend of $0.10 per share, plus a top-up of $0.07 per share due to the increased value of its surplus Bunge shareholding, taking total cash returns to about $2 billion. The payout will be made in two equal instalments in June and September.

Some early analysis of the inflation numbers.

“For the Bank of England, the January inflation data nods strongly towards the MPC delivering another 25bp cut at the next meeting, in March, especially after yesterday’s employment data pointed to a further margin of labour market slack having emerged, further reducing the (already low) risks of price pressures proving persistent,” says market analyst Michael Brown at Pepperstone.

“Of course, the MPC have already laid the foundations for a move next month, after February’s confab saw not only a hold by the narrowest possible vote split, and explicit guidance towards further easing, but also a dovish round of forecasts which pointed to CPI achieving the 2% target this spring, and remaining there.

“Today’s data does little to threaten those expectations, with the real risk now being that of an inflation undershoot as the year progresses.”

Consequently, Brown expects the ‘Old Lady’ will deliver a 25bp cut at next month’s meeting and reckons “further cuts will follow beyond then” to reduce the base rate to around 3% by the end of summer.

Thomas Pugh, chief economist at RSM UK, says the drop in inflation “all but nails on a rate cut next month”, with today’s drop expected to be come before inflation’s steep slide to 2% in April, setting the stage for another interest rate cut in the summer.

“However, given almost all the survey measures of prices suggest disinflation has slowed, the MPC will still have to be cautious this year, even as headline inflation drops. Indeed, services inflation is proving to be much stickier than headline inflation.”

He says this “doesn’t rule out a third cut later in the year, especially if the labour market remains weak, but it means a third rate cut is a downside risk rather than the base case at the moment”.

BAE Systems has hiked its dividend 10% as it reported record sales and an order book swelling ever larger as rising global defence spending feeds through into its numbers.

The UK defence contractor said sales rose 10% to £30.7 billion in 2025, with underlying earnings before interest and tax increased 12% to £3.3 billion, in line with City forecasts.

Order intake reached £36.8 billion, with the order backlog growing £5.8 billion to a record £83.6 billion.

Looking to the current year, BAE expects sales to rise 7-9%, underlying EBIT to increase 9-11% and underlying earnings per share to grow 9-11%. Free cash flow is forecast to exceed £1.3 billion.

The headline is that the annual rate of consumer price inflation fell to 3.0% in January from 3.4% at the end of last year.

Core CPI, which ignores more vaolatile prices such as fuel and food, fell to 3.1% from 3.2%, not quite the drop to 3.0% that was expected.

Likewise, services CPI, which is followed as a measure of the stickiness of infaltion, fell to 4.4% from 4.5%, but again not all the way to 4.3% as had been forecast.

Commenting on the inflation figures, ONS chief economist Grant Fitzner said: “Inflation fell markedly in January to its lowest annual rate since March last year, driven partly by a decrease in petrol prices.

“Airfares were another downward driver this month with prices dropping back following the increase in December. Lower food prices also helped push the rate down, particularly for bread & cereals and meat. These were partially offset by the cost of hotel stays and takeaways.

“The cost of raw materials for businesses fell over the past year, driven by lower crude oil prices, while the increase in the cost of goods leaving factories slowed.”

The FTSE 100 is likely to forge further into new virgin territory on Wednesday, as inflation fell to the lowest since last March.

Annual UK consumer price inflation has eased to 3.0% from 3.4%, as forecast.

The London index is seen rising another 28 points on the futures market this morning, after finishing at a record high of 10,556.17, having gained 82.48 points on the day.

Overnight, US stocks overcame a rocky start to finish just above the waterline by the close, with the S&P 500, Nasdaq and Dow Jones all ending up around 0.1%.

This morning, the Office for National Statistics revealed that the consumer prices index dropped 0.5% last month, bringing down the annual rate to the lowest in 10 months.