The Bank of England made the surprise decision to keep rates on hold on Thursday, with the nine voting members split five to four on whether to keep interest rates at 5.25%.
The FTSE 100 did pop higher in the immediate reaction, but the rally faded shortly afterwards, and London’s leading index was trading down 0.25% at 7,712 at the time of writing.
The FTSE 100 touched lows of 7,674 earlier in the session.
The skittish nature of UK stocks in the aftermath of the decision to keep rates on hold after 14 consecutive hikes reflects division in the Bank of England and the mixed picture of the UK economy.
“There were a lot of moving parts for the Bank of England (BoE) to contend with going into today’s decision. But, with yesterday’s core print still three times higher than the BoE’s target and wage growth remaining strong, the BoE clearly want to stamp inflation into the ground for good,” said Giles Coghlan, Chief Market Analyst consulting for HYCM.
“However, there is a risk that the ‘lag effect’ on interest rate hikes means that today’s decision may not be felt for another 9 to 12 months. As such, with economic growth already faltering and core inflation remaining high, today’s hike runs the risk of overtightening the economy and inducing a period of stagflation further down the line.”
As an ultra interest rate sensitive sector, Housebuilders were among the top risers on Thursday and built on yesterday’s gains. Taylor Wimpey was 1.6% higher, and Barratt Developments had gained 1.8% at the time of writing. Both were well off session highs.
While keeping rates steady at 5.25% is good for housebuilders and the UK property market, there is the question of what the Bank of England knows about the health of the UK economy that we don’t.
For the BoE to hold off hiking rates while inflation rates are still at 6.7% suggests they see a weakening in the UK economy, which would warrant keeping rates on hold.
With the Bank of England and Federal Reserve both keeping rates on hold in the last 24 hours, attention will very quickly shift to growth rates and what they mean for company earnings.
JD Sports & Next
Insight into the health of UK consumers was provided by Next and JD Sports on Thursday, who both reported positive first-half trading. The two were the FTSE 100’s top risers, with Next gaining 3.2% and JD Sports surging 6%.
Next increased their profit guidance for the year while JD Sports reported strong organic growth.