The Bank of England has announced that it will not be raising interest rates, in a move that breaks a series of rate increases and reflects a slowdown in the British economy. This decision has caused the pound to drop to a six-month low and has given a boost to London-listed stocks.
The pound fell by as much as 0.9% to its lowest level since late March. Meanwhile, gilt yields remained relatively unchanged and London-listed stocks experienced a rally. Rate-sensitive areas of the equity market, such as real estate shares and homebuilders, saw an increase in value.
Investors had already reacted to Wednesday’s news that UK inflation had cooled unexpectedly quickly in August, leading them to withdraw their bets on further rate hikes. This data appears to have influenced the Bank of England’s decision to keep rates unchanged.
Following the announcement, the pound was down by 0.7% against the dollar, trading at $1.2255. Against the euro, the pound was down 0.6%, at 86.89 pence. Interest rate futures indicate that traders believe there is a 70% chance that rates will remain unchanged at the Bank’s next meeting in November, compared to a 50/50 chance prior to the announcement.
The reaction in the stock market saw the FTSE 100 erase most of its earlier losses, trading down by just 0.1% after a 0.7% fall earlier in the day.
Richard Garland, Chief Investment Strategist at Omnis Investments in London, suggested that the Bank of England may believe that monetary policy is already tight enough to prevent strong wage growth, given weakening conditions in other areas of the labour market. He also mentioned that the recent better-than-expected inflation figures could have influenced the Bank’s decision not to hike rates.
Giles Coghlan, Chief Market Analyst consulting for HYCM in London, highlighted the complexity of the decision faced by the Bank of England. He noted that while the Bank wants to control inflation, there is a risk that the decision not to raise rates may not have an effect for another 9 to 12 months. Coghlan also warned that with economic growth already faltering and core inflation remaining high, today’s decision could result in over-tightening of the economy and lead to a period of stagflation down the road.
Overall, investors were expecting the Bank of England to signal lower rates in the future, so the reaction in the pound may be muted. However, if the markets anticipate stagflation and perceive a policy mistake by the Bank of England, the pound could potentially slide further.
The Bank of England has stated that it remains flexible to react should the circumstances change, but it is possible that this decision marks the peak of the current UK interest rate cycle.
More detail via Daily Mail Online here… ( Image via Daily Mail Online )