London shares rallied on Thursday in spite of a widely-trailed Bank of England rate cut to its lowest since the central bank was founded in 1694, as policymakers threw a bundle at worries over economic fallout following Britain’s vote to quit the European Union in June.
The blue-chip FTSE100 index closed up 1.6% at 6,740, led by insurer Aviva PLC (LON:AV), up 6.7% to 410.80p after posting bullish half-year results, with operating profit rising 13% to £1.325bn and operating earnings per share improving 1% to 22.4p.
However well-trailed, markets were on edge. Although most pundits expected a rate cut no one was certain how deep the bank would go. In the event the rate cut of 25 basis points to 0.25% was accompanied by a restoration of Quantitative Easing – a means of monetary largesse last seen deployed during the 2008-2011 credit crisis.
This time, the BoE signalled it would buy £60bn of government debt over six months and £10bn of corporate debt over 18 months. It also introduced measures to force banks to pass on the rate cuts to customers, especially mortgage and other loan borrowers.
The Bank also announced the biggest cut to its growth forecasts since it started making them in 1993. It has reduced its growth prediction for 2017 from the 2.3% it was expecting in May to 0.8%.
“Given how far sterling and UK rates had already fallen, surprising the market was always going to be a tall order, but it looks like the Bank of England has done just that,” said Timothy Graf, head of macro strategy at investor State Street Global Markets EMEA.
“They appear more concerned about the prospect of a deep recession than their inaction last month might have suggested. I am surprised that they decided to implement a number of measures to address the problem at such an early stage, but given the sharp drops we have already seen in the survey data, they likely anticipate more bad news to come,” he added.
The rate cut is the first since March 2009, when it eased rates by a more dramatic 50 basis points to 0.5% and ended a spate of six cuts which began in October 2008 when rates were still at 5%. Even in 2009, the 0.5% rate of interest was the lowest since 1694.
The FTSE 250 index ended up 1.5% at 17,244 – just 90 points off its pre-Brexit levels on June 23. The mid-caps were led by Serco Group PLC (LON:SRP) up 10.5% to 131.20p after the company swung into a first-half profit and lifted its guidance for 2016. For the six months to the end of June, the company swung to a pre-tax profit of £58.1mln from a loss of £16mln in the same period last year, even though revenue dropped to £1.5bn from £1.6bn.
The gains on the AIM market were more muted. The FTSE AIM 100 Index closed up 0.6% at 3,647 while the FTSE AIM All-Share Index also rose 0.6% to 761.
London gainers totalled 39% while losers were just 20% and unchanged 40%.
The Bank of England (BoE) has slashed interest rates by 25 basis points to 0.25% and is injecting an extra £60bn into the economy.
The bank's Monetary Policy Committee decided to reduce rates for the first time since March 2009 to prop up the flagging economy following the EU referendum vote. UK interest rates are now at their lowest since 1694.
It also is making £60bn of government bond purchases in the next six months and £10B of corporate bond purchases over the next 18 months.
The BoE also will launch a Term Funding Scheme—TFS—that will provide funding for banks at interest rates close to Bank Rate. Eight of the nine members voted for corporate bond purchases, and six to buy gilts.
The FTSE 100 Index responded by rising 89.9 points to 6724.32, but the pound tumbled 1.43% to US$1.3134 shortly after the announcement.
The Bank of England reportedly said the ‘Brexit’ vote has cost UK economy around £45bn.
It now forecasts a 2.5%-point cut to economic growth over a three-year horizon.
The price of a barrel of Brent crude dipped 0.7% to US$42.8 and a barrel of West Texas Intermediate fell 0.3% to US$40.7.
Small-cap indices were on the up, with the FTSE AIM 100 rising 15.67 points to 3640.34 and the FTSE AIM All-Share advancing 3.1 points to 760.4.
Zambeef Products Plc (LON:ZAM) was the top riser with a 43.9% gain to 11.5p as one of Zambia’s largest agri-businesses netted up to US$65mln of investment from a development finance group owned by the UK government.
Hague and London Oil Plc (LON:HNL) ticked up 22.6% to 4.75p after the company did a deal with ENGIE Global Energy Management, whereby ENGIE will offer innovatively structured gas off-take arrangements.
Support services group Serco PLC (LON:SRP) was in the money by 14.2% to 135.6p after first-half underlying trading profit increased by a better-than-expected 9%.
But Zamano Plc (LON:ZMNO) backtracked 16.15% to 10.1p on news that overall group contribution margins were lower as a result of increased advertising spend and the changing profile of the UK business.
But Randgold Resources PLC (LON:RRS) was among the top fallers, losing 7.9% to 8270p after the miner reported a hit to production and costs in the quarter to June, although it said the improvement expected in the second half of the year should boost its 2016 results to within its market guidance.
London’s FTSE 100 is set to move slightly higher on Thursday ahead of the Bank of England policy meeting.
It could be the first for seven years that sees an adjustment to interest rates, now that the economists have had just over a month to ruminate on the Brexit and the fallout from the referendum vote.
The BoE was among the first responders after the referendum results came in, quick to pledge support and liquidity. Now, the market is expecting more support.
“While it is widely expected today that the Bank of England will lower its growth forecasts it is also expected to make a move on interest rates for the first time since 2009, and cut rates by at least 25 basis points to a new record low of 0.25%,” said Michael Hewson, analyst at CMC Markets.
“It could also go on to announce the intention to implement further asset buying programs, however there is a school of thought that suggests the Bank should hold firm and wait and see.”
Overseas, meanwhile, markets are also waiting – for tomorrow’s non-farm payroll employment statistics.
Better than expected private company employment data for July, released yesterday, point to a better than forecast jobs market, nevertheless, the monthly NFP figures remain highly anticipated.
Wall Street managed a positive close on Wednesday. The Dow Jones added around 40 points, 0.23%, to end the session at 18,355 while the S&P 500 and Nasdaq gained 0.3% and 0.4% respectively.
Elsewhere, a rally in oil prices supported equities in Asia.
Japan’s Nikkei rose 0.7% to 16,193 while Hong Kong’s Hang Seng climbed 0.67% to 21,183.
The Shanghai Composite, meanwhile, edged lower to 2,972.
Oil prices strengthened and moved away from the lows of recent days. Brent crude gained 3.4% to US$43.29 while WTI crude added 4% to change hands at US$41.13 per barrel.
The price of gold was down slightly at US$1,351 per ounce.
Looking back to London, IG Markets sees the FTSE 100 just over 20 points higher.