Markets jump but Bank of England boss Bailey warns rate cuts are not on agenda

Markets soared yesterday after the US Federal Reserve signaled that its rate-hiking cycle was likely coming to an end, and despite the Bank of England sounding a note of caution.

London’s FTSE 100 index rose more than 2 percent in early trading to hit its highest level in almost three months, although it later ended up 1.3 percent, or 100.54 points, at 7,648.98 later. that the rally retreated when the bank’s governor, Andrew Bailey, backed down. on rate cut hopes.

U.S. indices were also leading in early trading, building on gains seen the previous day following comments from the Federal Reserve, which analysts said represented a long-awaited “pivot.”

And the pound was pushed to a four-month high against the US dollar, just below $1.28, on the likelihood that the US central bank will embark on cuts before the Bank of England.

It was a choppy session for UK bonds, with ten-year bond yields falling below 3.7 per cent to their lowest level since May before retreating back to their previous position. Bond yields fall as their prices rise.

The rally was sparked by comments from Federal Reserve Chairman Jerome Powell a day earlier that interest rates in the world’s largest economy were at or near their peak and that rate-setters had begun to discuss when they should start cutting back.

Chris Turner, global head of markets at ING Bank, said the Fed had “poured gasoline on the fire of easing expectations for 2024.”

Some of the intensity of the rally was taken away by the Bank of England, as well as by the caution of the head of the European Central Bank (ECB), Christine Lagarde.

Bailey said: ‘We’ve come a long way this year. But there is still a way to go.”

At the ECB, where rates were also left unchanged, Lagarde said: “We should not let our guard down at all.” We’re not talking about rate cuts at all.’

Danni Hewson, head of financial analysis at AJ Bell, said: “The Bank of England might not have given markets the kind of Christmas present given by Jerome Powell, but… nothing was going to calm the markets.” The Fed’s rhetoric is likely to pressure the Bank of England to act as well.

Yesterday markets were pricing in a 70 percent chance that the Bank could cut interest rates in May next year and a nearly one in three chance that it could happen as soon as March.

Martin Weale, a former member of the Bank’s Monetary Policy Committee (MPC), told Bloomberg: “There is still a long way to go, but if the Fed is cutting rates, that exerts a gravitational pull that the Bank of England would prefer to do without.’

Threadneedle Street officials voted – as did the Federal Reserve – to leave interest rates unchanged.

But his language was much more cautious: he warned that some inflationary pressures, such as wage growth, were stronger in Britain than in other advanced economies.

And although the majority of the nine MPC members voted to keep rates unchanged, three advocated an increase and cuts were not even discussed.

The Bank has raised interest rates to 5.25 percent to reduce inflation, which has fallen from 11.1 percent last fall to 4.6 percent.

But their goal is a 2 percent level. And Britain’s inflation level is significantly higher than that of the United States, where it has now fallen to 3.1 percent.

The Bank said rates would have to remain high “for an extended period of time.”