The FTSE 100 Index continued to move ahead today, building on large gains made after Bank of England boss Mark Carney signalled that interest rates could be slashed over the summer.
London’s top-flight shares were up almost 1 per cent in afternoon trading. Yesterday, the FTSE 100 closed at its highest level since last August following Carney’s announcement.
The Bank governor said he felt “some monetary policy easing will likely be required over the summer,” signalling a rate cut in July or August.
Calum Bennie, communications manager at financial services group Scottish Friendly, said: “Mark Carney’s warning that interest rates are likely to be on the way down is the last thing hard-pressed savers holding cash need to hear.
“While investors holding shares have actually seen the value of their investments increase post-Brexit, cash savers look set to see already meagre interest rates fall further, with banks unlikely to hold back from passing on any rate cuts we may see. Therefore, consideration of alternatives such as stocks and shares Isas, as opposed to holding most liquid wealth in cash, is a way for people to potentially obtain more attractive long-term returns, albeit whilst accepting that capital risk is attached.”
The prospect of rates being cut from their already historic low of 0.5 per cent continues to drag on sterling, which was lingering at $1.33 – a cent lower than before the Bank’s intervention.
Interest rates could even be slashed to zero by the end of this year, according to Bill O’Neill, head of the UK investment office at UBS Wealth Management.
“Beyond this, any further unexpected weakness in the economy is likely to see the quantitative easing programme reactivated, initially with a £50billion to £75bn extension early next year.”
FXTM research analyst Lukman Otunuga said: “Even before the Brexit saga, the nation was entangled in a losing battle with static inflation and soft economic data, which dimmed optimism over a rate hike in 2016. Sentiment remains bearish towards sterling and any recovery in value could be difficult as investors prepare for stimulus measures implemented by the BoE.”
Meanwhile, the Office for Budget Responsibility (OBR) has cancelled a July publication detailing its long-term economic forecasts in light of the EU referendum result.
The OBR will instead give a medium-term forecast in November or December, likely to be alongside the Autumn Statement, when a new Prime Minister will be in place.
“We are required to base our forecasts on whatever is current government policy at the time,” the OBR said.
“So in addition to incorporating any new tax and spending measures, we will need to take on board any information on the trade arrangements the government wishes to pursue. This would affect prospective trade volumes, migration flows and the size of any remaining financial contribution to the EU, all of which would have consequences for the public finances.”
The OBR will assess the impact of the Brexit vote on public finances, GDP, prospects for the labour market and any knock-on effects for inflation.
Economists have started to downgrade their forecasts for UK growth, with a recession forecast unless a quick deal with the EU can be done. Analysts at Investec, which is predicting a quarter-point cut to interest rates next month, have slashed their GDP forecasts to 1.7 per cent and 0.8 per cent for this year and next, down from 2 per cent and 2.6 per cent previously.
On Monday, Standard & Poor’s stripped the UK of its triple-A credit rating, but fellow ratings agency DBRS has said it was sticking with its AAA assessment, arguing that labour market and exchange rate flexibility support the economy’s “resilience”.