London Stocks, GBP Shrug Off Emergency Rate Cut Ahead of UK Budget

FTSE 100, GBP prices, news and analysis:

• The FTSE 100 index of the major London-listed stocks has gained only modestly after the surprise cut in UK Bank Rate.
• This suggests underlying weakness in UK equities on the day of a Budget at 1230 GMT that will increase Government spending to counter the economic impact of the coronavirus.
• GBP/USD has also barely responded to the rate reduction, implying underlying strength.

FTSE 100 outlook poor

A limited response by the FTSE 100 index of the major London-listed stocks to Wednesday’s emergency rate cut by the Bank of England may be signaling further weakness ahead for equities even though the UK Government will also likely ease fiscal policy in the Budget speech due to begin just after 1230 GMT.

A combination of the reduction in Bank Rate to 0.25% from 0.75%, central bank measures to support bank lending and an expansionary Budget all designed to cushion the economic impact of the Covid-19 coronavirus might have been expected to result in strong gains in the London stock market.

However, in early London trading the FTSE 100 index was up a relatively small 0.4%, less than the 1.5% and 1.7% gains for Paris’s CAC 40 and Frankfurt’s DAX.

FTSE 100 Price Chart, Five-Minute Timeframe (March 11, 2020)

Chart by IG (You can click on it for a larger image)

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Similarly, the British Pound declined only modestly after the rate cut and soon regained the lost ground, implying some underlying strength.

GBP/USD Price Chart, Five-Minute Timeframe (March 11, 2020)

Chart by IG (You can click on it for a larger image)

In the Budget, Chancellor of the Exchequer Rishi Sunak is expected to announce a major increase in Government spending, particularly on healthcare, to dampen the potential impact on demand of the coronavirus outbreak.

Further ahead, another rate cut by the Bank of England on March 26, taking Bank Rate down to zero, is now fully priced in to the overnight index swaps market. The central bank has also left room to ease monetary policy further by expanding its bond-purchase program – the UK version of quantitative easing.

UK economy fails to grow

The latest data show the UK economy failed to grow in January and also showed zero growth in the three months to January. As for the rate cut, outgoing Bank of England Governor Mark Carney said the Bank’s role is to help UK businesses and households manage through an economic shock that could prove large and sharp but should be temporary.

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— Written by Martin Essex, Analyst and Editor

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