Sterling and UK Stocks Rise on BoE's Optimistic Outlook
The British pound and UK-focused stocks experienced a significant rise today following the Bank of England's (BoE) unexpected decision to lower interest rates and its optimistic outlook on future rate adjustments.
The BoE's move marks its second interest rate cut since 2020, reducing the new rate from 5% to 4.75%. This decision was supported by the Monetary Policy Committee (MPC) with a vote of 8 to 1, demonstrating a strong consensus that exceeded market expectations.
The interest rate cut follows a high-tax, high-spending budget presented last week by Labour’s shadow chancellor, Rachel Reeves. The central bank believes this budget will boost inflation and economic growth. The BoE forecasts that the budget will expand the UK economy by approximately 0.75% next year but expects only a marginal increase in annual growth rates over the next two to three years.
As a result of the interest rate decision, the pound rose to $1.2967, reflecting a 0.68% increase and solidifying its position as the best-performing major currency in 2024. Concurrently, mid-cap companies listed on the London Stock Exchange reached session peaks, and UK government bonds displayed the strongest daily performance in nearly a month, reflecting increased investor interest in pound-denominated assets.
The BoE's budget analysis indicates that inflation could peak at an additional half percentage point in just over two years, potentially delaying the central bank's return to its 2% inflation target by a year. Nevertheless, money markets show that traders anticipate UK interest rates will only decline by just over half a percentage point next year. This forecast is considered overly cautious by some economists and analysts in light of recent budget changes.
British inflation, particularly the resilience of wages and the service sector, has set the UK apart from other developed countries and has contributed to the strength of the pound this year. With today's rally, the currency has appreciated approximately 2% against the dollar in 2024.
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