The FTSE 100 gained on before falling back Thursday after the Bank of England cut interest rates for the first time since the pandemic when it took rates to record lows to support a ravaged economy.
Since then, the BoE has increased interest rates from 0.1% to 5.25%, which has had broad-reaching effects on businesses, households, and the stock market. Today’s cut to 5% doesn’t take interest rates anywhere near where they have been over the past decade, but the move will have a significant impact on confidence.
“Whilst nominal in absolute terms it is a meaningful milestone in the direction of travel for monetary policy should add to the already building momentum in UK business and consumer confidence,” said Indriatti van Hien, Fund Manager at Henderson Small Companies Investment Trust.
Consensus for the decision to cut rates or not had been on a knife edge leading up to today’s historic announcement, which represents the Bank’s victory in controlling inflation and beckons an easing of pressures on households.
“The central bank has decided to fire the starting pistol on rate cuts in a move that will invigorate investors and mortgage holders alike,” said Rachel Winter, Partner at Killik & Co.
“The Bank of England was clearly satisfied with the recent fall in CPI to the 2% target level, and its choice demonstrates a deviation from the Federal Reserve across the Atlantic, which has yet to cross the finish line in its battle with inflation.”
The FTSE 100 gained in the initial reaction to the announcement, but the rally was sold into as the session progressed.
Market reaction
The FTSE 100 was supported by a string of upbeat earnings from companies including, Next, Barclays, and Shell on Thursday. Although the announcement was well received, with a sharp uptick of 30 or so points for the FTSE 100, the move was far from europhic.
The interest rate-sensitive housebuilding sector spiked higher but was quickly sold into, with Taylor Wimpey and Persimmon gaining just 0.5% at the time of writing.
Banks have been reducing mortgage rates in preparation for the rate cut, and today’s news is unlikely to offer any additional boost to the sector in the short term. Whether the Bank of England signals more cuts in the coming months will have a greater effect. Interest rate futures traders seem to think they will cut rates again, judging by current pricing.
Elsewhere, Next was storming ahead after yet another beat of expectations – something investors have become accustomed to. That said, another quarter of producing sales growth amid tough economic conditions was not lost on the market, and shares were over 8% higher at the time of writing.
Shell was 1% higher after it was confirmed that it was still a cash-generating machine, as free cash flow increased despite lower earnings.
The standout gainer was Rolls Royce, adding 10%. Investors cheered the reintroduction of shareholder distributions to commence later this year as the jet engine maker’s operating profit soared. The company embarked on a streamlining strategy that is now rewarding investors.