What Outperforms When Bank of England Cuts Rates

FTSE 100, FTSE 250 Price Analysis & News

• Bank of England Delivers Shock Rate Cut to Combat Coronavirus
• FTSE 100 Benefits from BoE Easing, However, Emergency Pose Greater Downside Risks
• FTSE 250 Has Outperformed the FTSE 100 When the BoE Eases

The Bank of England delivered an emergency rate cut of 50bps to a record low of 0.25%. This had also been only the third time in the central bank’s history to have cut interest rates at an unscheduled meeting. Prior times being on 18th September 2001 and 8th October 2008. Much like central banks across the globe (Fed, BoC, RBA), the decision to cut interest rates had been to combat the uncertainty and expected economic shock from the spread of the coronavirus, which has significantly weighed on risk appetite. This article looks at the impact that easing monetary policy from the Bank of England (including emergency rate cuts) have typically had on both the FTSE 100 and FTSE 250.

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FTSE 100 Benefits from BoE Easing, However, Emergency Pose Greater Downside Risks

The FTSE 100 has typically fared relatively well when the Bank of England eases monetary policy in the longer run, with the exception of the global financial crisis in 2008 and the tech bubble burst in the early 2000s. That said, when an emergency rate cut had been issued, the FTSE 100 tends to underperform in the near term, as such, with the spread of the coronavirus likely to get worse before it gets better, risks will continue to remain tilted to the downside.

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Source: Refinitiv, DailyFX

Figure 1: FTSE 100 During Bank of England Rate Cut Cycles

Source: Refinitiv, DailyFX

FTSE 250 Has Outperformed the FTSE 100 When the BoE Eases

Much like the FTSE 100, the more domestically focused FTSE 250 has performed better in the long term when the FTSE 100 eases monetary policy. That said, the FTSE 250 has tended to outperform the internationally exposed FTSE 100. While in the short-term the FTSE 250 has often continued to fall in the short-run with larger drawdowns following an emergency rate cut.

Source: Refinitiv, DailyFX

Figure 2: FTSE 250 During Bank of England Rate Cut Cycles

What Next for the Bank of England?

With the Bank of England providing a sizeable stimulus package and the UK Government announcing a fiscal boost, the UK looks to be the only country thus far to provide coordinated monetary and fiscal support. However, should the spread of COVID-19 worsen, the Bank of England can be expected to ease further, which would likely include more unconventional measures. The BoE have already signaled that the lower bound is below 0.25% but above 0% (0.1%), meaning that interest rates are noted expected to move notably lower. Alongside this, the incoming BoE Governor, Andrew Bailey has highlighted that the BoE has used up about half of its touted policy space (previously noted 250bps of policy space via forward guidance, rates and QE) and thus further action would likely see QE restarted.

— Written by Justin McQueen, Market Analyst

Follow Justin on Twitter @JMcQueenFX