UK stocks are poised for potential gains following the Bank of England’s (BOE) decision to cut the key interest rate by 25 basis points to 5.0%.
This move, aimed at stimulating economic growth, aligns with historical trends that suggest a positive outlook for benchmark UK indices in the months ahead.
Historical performance of FTSE 100 and FTSE 250
Historically, the FTSE 100 and FTSE 250 indices have responded favorably to BOE rate cuts.
In three out of the last four instances when the Bank of England reduced rates—specifically in 1986, 1990, and 1998—the FTSE 100 saw an average increase of over 20% within the subsequent 12 months.
Similarly, the FTSE 250 experienced even more significant gains, rallying by 25% or more in these periods.
However, it’s worth noting that the only exception to this trend occurred in 2007, when both indices experienced declines.
The FTSE 100 dropped by 38%, and the FTSE 250 fell by 46% over the year following a rate cut.
This downturn was largely attributed to the global financial crisis, making it an outlier in the historical data.
Impact of lower rates on GBP and housing market
The BOE’s decision to lower rates was endorsed by a narrow margin of five to four votes within the Monetary Policy Committee (MPC).
This decision reflects the central bank’s focus on fostering economic stability without triggering new inflationary pressures.
Consumer price inflation in the UK has moderated significantly, standing at 2.0% annually in May and June, down from a peak of 11.1% in October 2022.
The current rate cut comes amidst market expectations for additional reductions.
Money markets are signaling that the BOE might implement two more rate cuts over the next five months. In response to the rate cut, the British pound (GBP) initially weakened against the US dollar but later began to recover. This volatility underscores the market’s sensitivity to future monetary policy signals.
The BOE’s rate cut is also anticipated to provide a much-needed boost to the housing market.
Stephanie Daley of Alexander Hall commented on the potential positive effects, stating, “The BOE’s decision offers a significant opportunity for homeowners and homebuyers. While mortgage rates may not drop immediately, this change should help release pent-up demand and restore confidence in the housing sector.”
Overall, the BOE’s recent move could set the stage for a favorable period for UK stocks, particularly if historical patterns hold true.
Investors and market analysts will be closely watching how these developments unfold and what impact they will have on the broader economic landscape.
This article first appeared on Invezz.com
