FTSE 100 gains as ECB cuts rates

The FTSE 100 started the session off in the front foot and the day got better for equity bulls after the ECB announced its first interest rate cut since 2019 on Thursday.

The reduction in European interest rates to 3.75% had been widely predicted by economists, so it was no surprise to markets. That, said a major central bank cutting interest rates will go a long way to improving sentiment given the growth outlook has become increasingly cloudy in recent went weeks. 

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“The European Central Bank has, as widely predicted, cut the eurozone’s key interest rate to 3.75%, moving faster than the Bank of England and the Federal Reserve. The reduction will come as a relief for many consumers and companies, whose finances have been stretched to breaking point by the rapid ratcheting up of interest rates,” said Susannah Streeter, head of money and markets, Hargreaves Lansdown.

“But ECB policymakers are expected to hit the pause button now, as sticky inflation has returned as a worry. While rates went straight up like a rocket, they look likely to descend in bumpy fashion.”

The FTSE 100 gained 0.4% on Thursday amid a clear move to the downside in gilt yields with the 10-year falling below 4.18% as markets priced in the prospect of rate cuts by the Bank of England.

Today’s ECB interest rate decision is fascinating prelude to the Bank of England and Federal interest rate decisions next week. Although the ECB’s decision will have little bearing on what either do with rates, they will face increasing scrutiny if they hold off cutting rates when many other western central banks are starting to ease monetary policy.

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“The Bank of England and Federal Reserve might give the impression they aren’t swayed by what the ECB and other countries do, but the greater the number of central banks cutting, the more pressure they will be under to do the same,” said Russ Mould, investment director at AJ Bell.

There was a notable risk-on trade on Friday, with cyclical sectors leading the way higher. Miners enjoyed a wave of buying and UK banks has a good showing.

Antofagasta was the top riser with a 3% gain.

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