The FTSE 100 soared on Thursday as the Bank of England cut interest rates and signalled further rate cuts in the near-term, helping propel the index to fresh record highs.
London’s leading index stormed higher in early trade as investors front-run the decision to cut rates by 0.25% and extended gains after the release. The FTSE 100 was trading at 8,750 at the time of writing and was likely to remain choppy as the session progressed.
The cyclical sectors were among the top risers, with miners surging higher alongside financials. Overseas revenue earners were also among those companies gaining as the inverse relationship between the FTSE 100 and the pound kicked in.
“A weaker pound against the US dollar benefits companies which earn some or all of their money in the American currency, hence why we saw miners, gambling group Entain, construction rental firm Ashtead and ratcatcher Rentokil get a boost,” said Russ Mould, investment director at AJ Bell.
The Bank of England has fired up equity bulls by signalling to the market they can expect additional rate cuts before long.
In a signal of what the Bank of England may do in the future, seven of the nine MPC voting members voted for a 0.25% cut, while two voted for a 0.5% cut.
The country is on the verge of stagflation and must choose between controlling inflation and supporting the economy.
The BoE’s core mandate is to keep inflation at its target rate of 2%. However, they are also responsible for price stability, which is threatened by the economic outlook.
A risk for the Bank of England is that by not cutting rates now, growth will suffer, and they may end up with the problem of inflation below 2% down the road as the economy slows further and jobs are lost.
This would have consequences for financial markets, leading to volatility in equity and bond markets.
“Looking longer term, there is still work to be done to find the ‘neutral’ level for rates where the UK economy can deliver price stability,” said Brad Holland, director of investment strategy at Nutmeg.
“As a result, the committee remains in monitoring mode, assessing the impact of rate cuts on growth and how recent measures taken in the Autumn Budget could impact inflation.”
The bank’s job has been made that much harder by the government’s economic policies that are threatening to slow the pace of hiring when the changes to national insurance come into play.
In effect, today’s decision to cut rates by 0.25% is a move to bail out Rachel Reeves.
Nonetheless, it is a welcome move for the UK economy, which should help spur activity.
Housebuilding shares soared after the interest rate cut announcement and joined the ranks of the already well-bid miners and overseas earners. Taylor Wimpey jumped 3%, and Persimmon added 2.5%.