FTSE Rally on Stronger Commodity Prices and BoE Expectations
Crude oil prices recovered some lost ground helping energy stocks higher. Talk on the street of BoE action.
Stronger commodity prices and anticipation of a BoE interest rate cut send the FTSE higher today. Top performers are NatWest up nearly 7% and Anglo American up almost 4%. The main factor sparking the rally is next week’s monetary policy meeting.
The market is talking up hopes of a rate cut of 0.25%, in the past months the BoE has been silent due to rules about commentary prior to a general election. However, traders are fueling the notion that the next meeting will provoke a very close call on interest rate policy.
At the previous meeting 2 board members voted for a cut, since then consumer price inflation remained at the 2% target in June. The June data showed a second consecutive month with inflation stable at the BoE target.
Employment has also slowed as fewer vacancies come on to the job market and a slight rise in unemployment. Wage growth has also declined, although not as far as the central bank has expected.
Four BoE MPC members have spoken since the general election on July 4, 2 of them can be considered as against a rate cut, while one is uncertain, and Swati Dhingra is clearly in favor of cutting rates.
Probabilities
Interest rate futures show a 50% chance of a rate cut at the next MPC meeting on August 1. The calculation factor is a 25 basis point cut for next week. Many analysts believe the call is as close as it can get.
The market may not entirely view a possible decision to keep rates on hold negatively. The number of votes for a cut would also have a large impact. If the decision is close we should have 4 members voting for a cut.
That number would show empirically just how close the call was and we may still get a surge in the FTSE on the anticipation that a cut will happen at the following meeting in September. Some economists have pointed to the likely upward revision from the BoE on GDP growth.
Next week many analysts are expecting the central bank to revise its GDP forecast to 1% from 0.4% in May. The matter is that that upward revision would depend greatly on early action in cutting rates.
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