The FTSE 100 has rallied after Mark Carney said the Bank of England was likely to launch stimulus this summer to help the UK economy cope with the shock triggered by the ‘Brexit’ vote.
The UK blue-chip index closed 144 points, or 2.3%, higher at 6,504 while the pound fell 1.2% against the dollar to $1.326 on the news. The yield on 10-year UK government bonds, or ‘gilts’, which fell below 1% for the first time in history this week, dropped to 0.886%.
‘In my view, and I am not pre-judging the view of other independent monetary policy committee (MPC) members, the economic outlook has deteriorated and some monetary policy easing will be required over the summer,’ he said.
Investors have been anticipating the Bank of England could cut interest rates further from their historic low of 0.5%, or relaunch quantitative easing following the shock win for the ‘leave’ campaign in the European Union referendum.
But Carney also warned there was a limit to how low rates could go. ‘As we have seen elsewhere, if interest rates are too low (or negative), the hit to bank profitability could perversely reduce credit availability or even increase its overall price.’
James Knightley, economist at ING, said he expected the Bank of England would cut interest rates to 0.25% in August, possibly coupled with quantitative easing.
‘We have our doubts that this will prevent the UK from slipping into a technical recession in 2017 so we may see a further rate cut taking bank rate to zero (or fractionally above it) before the end of the year,’ he said.
Marc Ostwald of ADM Investor Services said it shouldn’t be assumed rates would be cut immediately. ‘The MPC might rather opt for more quantitative easing… but clearly it is a possibility,’ he said.
‘While some markets may rejoice at the prospect of more “easing”, there will be a lot of criticism that he has undermined confidence even more with his comments, above all the pound, where he should be looking to soothe investors, particularly after another shambolic display of the current state of UK politics.’
The UK blue-chip index fell 34 points, or 0.5%, to 6,326, after a surge yesterday that saw the index recover all the losses made in the sell-off sparked by the UK’s vote to leave the European Union.
However, the recovery should be set in the context of the pound’s tumble against the dollar on the ‘Brexit’ vote, with sterling having mounted a more muted rally from 31-year lows.
Banks fell to the bottom of the index. Royal Bank of Scotland (RBS) was down 3.7% at 173.5p, Barclays (BARC) dropped 1% to 136.6p and Lloyds (LLOY) fell 1% to 55p.
They were weighed down by the results of the US Federal Reserve’s annual stress tests on banks, which cast concerns over Morgan Stanley and the US subsidiaries of Deutsche Bank and Santander.
‘While both subsidiaries are separate from their European parents the fact that both have failed the tests for a second year in a row isn’t likely to inspire confidence at a time when both bank’ parent entities need it more than ever,’ said Michael Hewson, chief market analyst at CMC Markets UK.
‘Despite the recovery in the FTSE 100, the FTSE banks index still remains down 11% from its pre Brexit levels as the prospect of lower for longer interest rates keeps investors cautious.’
House builders also gave up some of the recovery from the past two days. Taylor Wimpey (TW) was down 3.5% at 128.2p, Barratt Developments (BDEV) dropped 3.4% to 394.7p and Berkeley (BKGH) was down 2.4% at £24.90.
3i (III) jumped to the top of the index, up 5.5% at 532.5p after the private equity investment trust said it had received a number of approaches for its Dutch retailer Acton, but said it had no plans to sell.
The pound edged lower against the dollar, down 0.1% at $1.341, while the FTSE 250 index of ‘mid cap’ shares also fell, down 0.4%, but the FTSE Small Cap index rose 0.2%.
Eurozone markets also gave up gains. The French CAC 40 was down 0.8%, the German DAX 30 lost 0.5%, Spain’s Ibex fell 0.6% and Italy’s FTSE MIB dropped 1%.