Prospect of fewer rate cuts buoys sterling and UK-focused stocks
The pound and UK-focused stocks rose this afternoon after the Bank of England indicated it would take a more “gradual” approach to cutting rates in the year ahead.
The Bank’s Monetary Policy Committee (MPC) voted to lower the base rate to 4.75 per cent in a widely anticipated move that follows a sharp fall in the rate of inflation in recent months.
Figures out last month showed the headline rate fell to 1.7 per cent in September, its lowest level since April 2021 and below the Bank’s target of two per cent.
London-listed shares of mid-sized companies touched session highs, while UK government bonds headed for their best one-day performance in almost a month, reflecting investor demand for sterling-denominated assets.
The FTSE 250, which is more exposed to the domestic economy than the blue chip FTSE 100, rose 0.2 per cent through the afternoon.
Sterling rose by as much as 0.78 per cent to $1.298 after the decision, while two-year gilt yields fell six basis points to 4.438 per cent, as bond prices rose .
The decision came as governor Andrew Bailey warned that Threadneedle Street would be forced to take a “gradual” approach to cutting rates next year in response to potential inflationary pressures and the impact of the government’s Budget.
“If the economy evolves as we expect, it’s likely that interest rates will continue to fall gradually from here,” Bailey said, adding that the Bank of England “can’t cut interest rates too quickly or by too much” given lingering concerns over inflationary dynamics.
In particular, the Bank flagged the potential inflationary implications triggered by the new government’s plans to ramp up borrowing
The Labour government announced around £40bn in tax rises last week and £30bn a year additional borrowing to fund an average £70bn annual spending splurge.
The Bank said the combination of tax rises and spending increases will force up inflation and boost growth.
Economists polled by Morning Wire last weekend expected fewer than four rate cuts next year, down from five prior to the budget.