Large investors are growing more optimistic about a rebound for undervalued U.K. assets, as the Bank of England (Boe)’s move to cut interest rates from a 16-year high boosts the positive sentiment from the new British government’s landslide election victory.
The BoE reduced rates by a quarter point to 5.0 percent on Thursday, a decision that had been seen as a close call by the markets.
Signals of improving conditions in U.K.
The result, according to fund managers, signaled that Britain’s battle with weak growth and high inflation might be nearing its end, just as a period of political turmoil and uncertainty also appeared to be drawing to a close.
U.K. assets shaken by past challenges
Shaken for years by Brexit, successive leadership changes under the former Conservative government, and former Prime Minister Liz Truss’ 2022 mini-Budget, U.K. stocks are undervalued and government bonds are trailing their U.S. counterparts.
Upgraded growth forecasts
However, while the Bank of England’s policymakers voted 5-4 to cut rates, revealing deep division over whether inflation has been tamed, they also cheered investors by raising their economic growth projections.
The Monetary Policy Committee voted by a majority of 5-4 to reduce #BankRate to 5%. Find out more: https://t.co/zBZeLlwSxD pic.twitter.com/YOcCTfER5o
— Bank of England (@bankofengland) August 1, 2024
“The unusual combination of a rate cut and an upgraded growth forecast should be a clear positive for markets,” said Seema Shah, chief global strategist at Principal Asset Management.
“The U.K. today has fiscal policy that looks much more normal than during recent crises, and the macroeconomic backdrop is improving as growth picks up,” said Bill Papadakis, macro strategist at Lombard Odier.
“This development in monetary policy is really the icing on the cake.”
Papadakis further said he had turned bullish on UK stocks around the time former Prime Minister Rishi Sunak called the election in late May and would maintain this position, predicting that the signs of weakness in British markets on Thursday were temporary.
Sterling briefly fell to its lowest in nearly a month after the decision, before recouping much of those losses to trade around 0.7 percent down on the day at $1.2772. Two-year gilt yields, the most sensitive to BoE policy, fell 11 basis points to 3.703 percent, while the FTSE 250 index dipped 0.65 percent but remained close to its highest level since early 2022.
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