UK Retail Recovery Steadies Sterling and FTSE

UK retail sales rose 0.5 percent in September, surprising economists and signalling that households are gradually adapting to elevated borrowing costs. According to the Office for National Statistics (ONS), gains were broad-based, led by food, household goods, and online categories, even as real disposable incomes remain under pressure.

The FTSE 100 held firm near 8,250 points, supported by strength in retail and energy shares, while the pound (GBPUSD 1.286) advanced modestly. Ten-year gilt yields eased to 4.06 percent as investors priced in a higher likelihood of monetary easing next year. Headline inflation slowed to 3.4 percent, maintaining its downward trajectory, while core inflation remains just above 4 percent — close enough for markets to anticipate a Bank of England (BoE) policy pivot by Q1 2026.

Despite the headline optimism, consumer sentiment surveys indicate continued caution. Elevated mortgage repayments and lingering cost-of-living pressures weigh on discretionary spending, though stable employment and slowing inflation have helped restore partial confidence. Analysts note that the current recovery reflects adaptation rather than exuberance: households are tightening budgets, substituting toward lower-cost goods, and benefiting from easing energy bills.

The BoE, which has maintained its base rate at 5.25 percent since August 2024, is expected to cut by 25 basis points in early 2026 if inflation continues to trend lower and wage settlements moderate. Policymakers are likely to wait for December and holiday-season spending data before confirming the shift. For now, stable retail volumes, a firmer currency, and resilient equity markets suggest the UK may be approaching a soft landing — with growth slowing, not stalling.