Pound, UK stocks get a lift from BoE 'sugar rush'

BY Reuters | ECONOMIC | 11/07/24 08:44 AM EST

*

BoE's second rate cut since 2020

*

Sterling rallies sharply; 2024's best major currency performer

*

BoE's Bailey now sees inflation returning to target mid-2027

*

Sterling may lose sheen if markets start to expect faster rate fall

(Updates with comments, adds graphic; refreshes prices at 1452 GMT)

By Yoruk Bahceli and Amanda Cooper

LONDON, Nov 7 (Reuters) - Sterling rallied sharply on Thursday, solidifying its position as the best performing major currency of 2024, while UK-focussed stocks rose after the Bank of England cut rates but indicated future cuts may be more gradual than many had thought.

The BoE, which delivered its second rate cut since 2020, said that after Labour Party finance minister Rachel Reeves' high-tax, high-spend budget last week, it expected higher inflation and growth.

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.

Sterling rose by as much as 0.78% to $1.298 after the decision, while two-year gilt yields fell 6 basis points to 4.448%, as bond prices rose.

The Monetary Policy Committee (MPC) voted 8-1 to cut rates to 4.75% from 5%, a stronger majority than expectations in a Reuters poll for a 7-2 vote in favour of a cut.

The BoE predicted last week's budget, which contained big increases in tax, spending and borrowing - would boost the size of Britain's economy by around 0.75% next year but barely improve annual growth rates in two or three years' time.

It said the budget was likely to add just under half a percentage point to the rate of inflation at its peak in just over two years' time, causing inflation to take a year longer to return sustainably to its 2% target.

Right now, money markets show traders believe UK rates could fall by just over half a percent next year - something economists and analysts believe is too tame, given the BoE's predictions predate the rise in gilt yields and the shift in market borrowing rates following the budget.

"Remember, markets are pricing fewer than three rate cuts from here on in," James Smith, developed markets economist - UK, at ING said.

"We don't think that sounds particularly realistic. Our view is that rate cuts will be cut at every meeting from February until rates reach 3.25% next autumn."

British inflation has proven far more stubborn than that in other developed nations, particularly where wages and the services sector are concerned.

Governor Andrew Bailey said the BoE now saw inflation returning to target by mid-2027, from a previous estimate of mid-2026.

"That information was made less useful because it probably wouldn't look quite like that if they took into account the market's repricing in the wake of the budget," Rabobank senior rates strategist Lyn Graham-Taylor said.

UK rates remaining higher for longer and then falling more slowly than elsewhere has been a key driver for sterling.

The pound is the best-performing major currency against the dollar this year, up 2% with Thursday's rally.

Sterling could lose that sheen, especially if markets adjust to the view that British rates could fall faster, analysts said.

"I think that will become clear as peers, such as the U.S., begin to outpace the UK to a more significant degree, although the near-term sugar rush from the Budget might mask that for a short while," Pepperstone senior research strategist Michael Brown said.

(Additional reporting by Samuel Indyk; Editing by Alun John, Dhara Ranasinghe and Ros Russell)

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.

fir_news_article