The FTSE 100 spiked higher on Thursday after the Bank of England kept rates on hold at 5.25%, but signalled rate cuts are on the horizon.
London’s leading index touched fresh intraday record highs after the BoE said higher rates were helping to bring inflation down and ‘progress was encouraging’.
UK 10-year Gilt yields fell in the immediate reaction, and GBP/USD slid to 1.2463.
The weaker pound and hopes of near-term rate cuts helped the FTSE 100 reach 8,394 before falling back.
The nine-member voting committee voted 7-2 in favour of keeping rates on hold representing a division among members. It will be fascinating to see how many more join those voting for rate cuts at the next meeting.
“There’s been a shift in opinion around the table, with another member of the MPC, Dave Ramsden, voting for a rate cut, joining Swati Dhingra who has been vocal about the need for lower borrowing costs for some time,” said Susannah Streeter, head of money and markets, Hargreaves Lansdown.
Inflation is still way above the Bank of England’s 2% target, and nobody expected a rate cut today. The focus was always going to be on the commentary around the decision, which was undoubtedly dovish.
The significant risk for the Bank of England is cutting rates when inflation is above their 2% target and inflation rising as a result of their actions. This could mean they are forced to raise rates again and risk sending shock waves through UK assets and the economy.
“The Bank is weighing the lesser of two evils: on one side of the scale higher mortgage rates and borrowing costs continue to put pressure on household finances; on the other side a cut to the interest rate, while positive for growth, likely decreases the value of the pound stimulating further inflationary pressure through rising import costs,” said James McManus, chief investment officer at Nutmeg.
The Monetary Policy Committee voted by a majority of 7-2 to maintain #BankRate at 5.25%. Find out more in our #MonetaryPolicyReport: https://t.co/2lnXthHbMt pic.twitter.com/HXZdRjxPnl
— Bank of England (@bankofengland) May 9, 2024
Equity investors were likely to take any signs of a rate cut well, and the FTSE 100 reacted accordingly. Fresh intraday highs were recorded in the rally, driven predominantly by overseas earners as the pound fell against the dollar.
Diageo, BP, Vodafone, GSK, and Unilever all notched up gains on the lower pound.
The housebuilders’ reaction after the sector rallied into today’s announcement was mixed. Persimmon was down 0.7%, and Taylor Wimpey gained 0.6%.
While the promise of lower rates is good for the sector, it can’t come soon enough for builders struggling with higher mortgage rates.
“A decision to hold the interest rate is no real surprise, but a disappointment nonetheless for borrowers hoping to see it slashed. Inflation, though dropping ever so slightly, is clearly still top of mind for the MPC, leading us all to await a first cut in either June or August,” said Joe Pepper, UK Chief Executive Officer, PEXA.
“It marks another blow for the housing market, which is seeing reduced activity as potential buyers await a reprieve in costs and remortgagers understandably wait for lower rates.”
BAE Systems gained 1.2% after maintaining full-year guidance, as higher defence budgets bolstered the defence group’s sales.
HSBC was one the biggest fallers as the stock traded ex-dividend.