The Bank of England looks set to embark on a series of interest rate cuts this year as Donald Trump’s trade policies rock the global economy and hit the UK’s growth rate.
After remaining steadfast in their cautious approach to interest rate cuts in the face of stubbornly higher inflation, the Bank of England is now being forced to act as tariffs threaten the UK economy.
“Donald Trump’s tariffs have caused a massive reappraisal of the future path of UK interest rates,” said Laith Khalaf, head of investment analysis at AJ Bell.
“As things stand markets are focusing on the collateral damage to the UK economy rather than the potential for a trade war to ignite inflation once again. As a result, the market is now assigning a 50% chance to the base rate being 3.5% or lower by the end of this year.”
Interest rates falling below 3.5% will likely be the result of some economic pain, but lower interest rates could provide a base for future growth. Here are the FTSE 350 sectors set to take advantage of any rate cuts this year.
FTSE 350 Housebuilders
Probably the most interest-sensitive FTSE 350 sector, the housebuilders will lap up any reduction in interest rates.
The sector has been ravaged by the higher interest environment in response to rising inflation, which has increased mortgage rates and eroded consumers’ spending power.
Lower interest rates, and most importantly, the perception of lower interest rates in the future, will help lift activity in the property market.
It will also encourage more first-time buyers to purchase their first home – the lifeblood of the UK housing market.
“Donald Trump may not have intended to liberate UK mortgage holders from high rates, but his tariff announcements have done just that,” explained Khalaf.
“Since Liberation Day, the swap rates which stand behind mortgage pricing have fallen decidedly below 4%, and we have seen a wave of lenders offering more competitive mortgages.”
Names such as Persimmon, Taylor Wimpey and Vistry are all set to benefit from the Bank of England rate cuts.
FTSE 350 Supermarkets
Another heavily UK-centric sector, supermarkets are well placed to capture any improvement in consumer confidence created by lower interest rates.
Companies such as Sainsbury’s and Marks and Spencer should enjoy shoppers allocating savings on interest payments to more premium lines.
The feel-good factor of falling mortgage rates will likely see a tick up in retail sales, which the supermarket sector and retailers generally will see the impact of in upcoming trading statements.
Higher spending on premium lines will translate into improved margins and provide some reprieve in the bitter battle with the discounters.
FTSE 350 Utilities
Utility companies such as National Grid and Severn Trent will enjoy a two fold benefit from lower interest rates.
First, lower interest rates will help reduce their interest payments and help boost earnings. Utility companies take full advantage of their ability to issue debt to an army of ready, willing and able fixed-income investors, and as a result, incur substantial costs in the form of payments to bondholders. Lower interest rates mean they’ll be able to lower their coupons and reduce these costs.
The second advantage of falling interest rates for utility stocks is the potential wave of cash coming out of bonds into equities. As interest rates fall, income-seeking investors will seek ‘bond proxy’ stocks such as utility companies that can provide reliable cash flows at a higher dividend yield than can achieve in government bonds.