FTSE 100 Closes Higher as BoE Cuts Interest Rates

The FTSE 100 index closed 0.65% higher at 9,837.77 today, buoyed by the Bank of England's (BoE) decision to cut interest rates. The central bank's move, aimed at stimulating the UK economy, triggered a positive response in the market, despite lingering concerns about inflation.

The BoE's Monetary Policy Committee (MPC) voted 5-4 to trim the benchmark interest rate by 25 basis points to 3.75%, marking the fourth cut of the year. This decision, while widely anticipated by economists, revealed a split within the MPC regarding the appropriate course of monetary policy. The markets reacted positively to the prospect of lower borrowing costs, as these are expected to stimulate consumer spending and business investment.

Retail stocks witnessed a notable rally, with companies like Currys leading the charge by surging 9.02% on strong profits, while Frasers Group (+2.13%) and Ocado (+5.25%) also posted gains. The FTSE 100 is on track for its best annual performance since 2009, registering gains of 19.1% year-to-date, outperforming the S&P 500’s 15.3% gain.

The BoE's decision was driven by a combination of factors, including a recent decline in inflation and signs of a softening labor market. The Consumer Price Index (CPI) showed a sharper-than-expected decline to 3.2% in November. The unemployment rate rose to 5.1%, indicating a cooling labor market. The MPC acknowledged that while inflation remained above the 2% target, it is expected to return to target more quickly in the near term.

However, the committee signaled caution regarding further rate cuts, stating that future policy easing would depend on the evolving inflation outlook. The MPC indicated that the Bank Rate is likely to continue on a gradual downward path, but judgements around further policy easing will become a closer call. Sterling remained flat against the dollar post-announcement, as did the FTSE 100. The yield on the benchmark 10-year U.K. gilt was up 3 basis points to 4.510%.

Chancellor Rachel Reeves welcomed the rate cut, highlighting its potential to alleviate cost of living pressures. She noted that the cut was the sixth since the election in July 2024. This is the fastest pace of cuts in 17 years and good news for families with mortgages and businesses with loans.

The BoE's decision contrasts with the European Central Bank (ECB), which has maintained its benchmark deposit rate at 2%. The ECB President emphasized caution due to global uncertainties and indicated a meeting-by-meeting approach to future rate adjustments.

The BoE's interest rate cut reflects a strategic move to bolster the UK's economy in the face of easing inflation and a weakening labor market. While the initial market response was positive, the narrow vote within the MPC and the cautious outlook suggest that future monetary policy decisions will be closely tied to forthcoming economic data and inflation trends, shaping market sentiment going forward.