Market report

Interest rate cut a close call as UK GDP rises

Jeremy Hunt (Treasury)
Jeremy Hunt: welcome sign

London’s FTSE 100 rose to within its record high after data showed Britain’s economy grew by 0.1% in February and January’s reading was revised higher to 0.3% from 0.2%.

The country entered a shallow recession in the second half of last year, and the latest figures should confirm that it has returned to growth, providing some relief for the Conservative government in an election year.

Chancellor Jeremy Hunt said: “These figures are a welcome sign that the economy is turning a corner, and we can build on this progress if we stick to our plan.”

Jeremy Batstone-Carr, European strategist at Raymond James Investment Services, said:  “Decelerating inflation paves the way for the Bank of England to commence its rate cutting process in the coming months, a decision which should also prove supportive to the growth outlook.”

However, analysts are divided on whether the data, including a slowing of price growth, confirms the likelihood of rate cuts in the summer or if such action would rekindle inflation.

Ben Jones, CBI lead economist, said: “While growth was probably fairly modest over the first quarter, the outlook is improving with our business surveys showing growth expectations for the second quarter at their strongest for almost two years. 

“But we need to get some momentum going in economy without undoing hard work to bring down inflation. In this General Election year, it’s crucial parties of all stripes focus on structural challenges facing economy – like poor productivity and labour market pressure.  

“What firms across all regions, nations and sectors tell us they need to drive sustainable growth, is stability and a long-term economic vision – which in turn will deliver prosperity to businesses and households alike.” 

The FTSE 100 closed 71.78 points higher, or 0.91%, at 7,995.58 after flirting with the 8,047 record it hit in February last year. It was led by miners, including Fresnillo which saw gains of more than 7% and Glencore up 5.1% buoyed by gold prices hitting record highs and surging oil prices.

While London soared, Wall Street suffered a day of selling as inflation and geopolitical worries once again dented investor sentiment. A broad decline in major bank shares also weighed on the market.

The Dow Jones Industrial Average slid 475.84 points, or 1.24%. The S&P 500 tumbled 1.46% and the Nasdaq Composite fell 1.62%.

On Thursday the European Central Bank held its interest rates at a record high for a fifth meeting in a row as it awaits key economic data that could be the trigger for it to loosen monetary policy.

The central bank of the 20 eurozone countries elected to hold the deposit rate at 4%, a decision that had been widely anticipated by financial markets.

Inflation has been falling steadily throughout Europe for 18 months, coming down to 2.4% from a peak of about 11% and raising speculation that the ECB will start cutting interest rates soon.

Christine Lagarde, president of the central bank, said that a “very, very large majority” of members of its governing council had wanted to wait for the publication of new economic figures to be released in the run-up to its next meeting in June before deciding whether to cut interest rates. She added that a cut would happen only if this data reinforced the conviction that price pressures were receding.

Bank of England
The Bank of England may cut interest rates in June (pic: Terry Murden)

Figures earlier this week revealed that American inflation had climbed to 3.5% last month, from 3.2% previously and above Wall Street analysts’ expectations.

Traders now think that the US Federal Reserve will lower the range of its federal funds rate either once or twice this year from a 23-year high of 5.25% to 5.5%, down from as many as six reductions predicted at the beginning of the year.

Services and core inflation, which are watched closely by central banks, also remain elevated in Britain and the eurozone.

At its last meeting, the Bank of England said that it could lower interest rates and still maintain its restrictive policy stance, prompting some City analysts to forecast that it would make its first reduction in June, although August or September remain the most likely months. Inflation in the UK has fallen to 3.4% from a 40-year high of 11.1%, while markets now expect two or three interest rate cuts.

“If only investors possessed a crystal ball, all the speculation about when and if rate cuts might materialise would be put to bed,” said Danni Hewson, head of financial analysis at AJ Bell.

“Sadly, we’re stuck with trying to decipher the vagaries of inflation and pick our way carefully between the lines of central banker comments.

“The ECB tantalised us with hints that it might just hit the rate cut button next month, but on the other hand Christine Lagarde stressed they were not pre-committing to action and warned there would be bumps in the road.

“For investors it’s hard to know which way to jump but there’s still been plenty of jumping. London markets seemed to show a spot of profit taking and sleight of hand, with yesterday’s big winner Tesco among today’s losers.

“Many investors will be feeling pretty fed up with the roller coaster they’ve been hitched to.

“Where just a few months ago markets were betting rates here in the UK could fall below 4% by Christmas now only two cuts are being priced in. The sands are shifting and investors are having to be fleet of foot.”

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