If BOE cut interest rates how will that affect the FTSE?

[R123]

Apparently the Bank of England maybe about to cut interest rates; will such an action cause the FTSE to rise or fall? (My internet research gives contradictory opinions).

Thanks any input

[chiang mai]

Typically, Sterling up, equities down and vice versa, having said that, the rate cut today has been so well known in advance that any adjustments to the FTSE are probably already in..

[Oxx]

Which FTSE? The FTSE 100 will respond differently from the FTSE 250, given that the former is primarily international companies whose business will be unaffected by changes in interest rate, but will be affected by changes in exchange rate.  For the FTSE 250 the business will be hit by changes in interest rate, but in most cases less so by changes in exchange rate.

 

Then, there again, markets are far from rational, so which way any index moves is unpredictable.

[R123]

The FTSE 100.

[Oxx]

Lowering interest rates would be predicted to lead to a fall in the value of Sterling.  However, FTSE 100 company earnings are largely in other currencies so will actually increase in value when expressed in Sterling.  This would be expected (all other things being equal, which they never are) to increase the share price, so the FTSE 100 should go up.  However, because the interest rate cut has been well prepared for, it's likely that this increase in the FTSE has already been factored in.

[Oxx]

It sounds like I was along the right lines.  From the FT:

 

"The pound is slipping back while the FTSE 100 is expected to make modest opening gains as attention turns toward the Bank of England, which is expected to announce looser monetary policy at midday."

[MissAndry]

Current rate 0.5%, proposed new rate 0.25%.

You can't convince me that anything they do with minor alterations to rates this low will change anything.

 

Now raising them to 4% might do something!

[chiang mai]

45 minutes ago, Oxx said:

It sounds like I was along the right lines.  From the FT:

 

"The pound is slipping back while the FTSE 100 is expected to make modest opening gains as attention turns toward the Bank of England, which is expected to announce looser monetary policy at midday."

 

The FT got it from post number 2.

[Oxx]

15 minutes ago, chiang mai said:

 

The FT got it from post number 2.

 

I could have sworn that post #2 said "Sterling up, equities down" - just the opposite of what the FT scribbled.

[chiang mai]

16 minutes ago, Oxx said:

 

I could have sworn that post #2 said "Sterling up, equities down" - just the opposite of what the FT scribbled.

 

You don't understand the term, vica versa, do you!  http://www.merriam-webster.com/dictionary/vice versa

 

BTW that rule of equities and currencies moving in opposite directions is very old and well established, there's nothing new there and nothing to be guessed at.

Edited August 4, 2016 by chiang mai

[Oxx]

46 minutes ago, chiang mai said:

 

You don't understand the term, vica versa, do you!  http://www.merriam-webster.com/dictionary/vice versa

 

BTW that rule of equities and currencies moving in opposite directions is very old and well established, there's nothing new there and nothing to be guessed at.

 

I most certainly don't understand "vica versa".  "Vicus", yes, but it seems irrelevant in the contest.  Attempting a translation "Adversely against a local community built outside the walls of a Roman fort" really doesn't make much sense.

 

Your "two way punt", if that's what you intended, was meaningless.  I apologise for attempting to interpret it as something meaningful.

[chiang mai]

6 minutes ago, Oxx said:

 

I most certainly don't understand "vica versa".  "Vicus", yes, but it seems irrelevant in the contest.  Attempting a translation "Adversely against a local community built outside the walls of a Roman fort" really doesn't make much sense.

 

Your "two way punt", if that's what you intended, was meaningless.  I apologise for attempting to interpret it as something meaningful.

 

My spelling might be slightly amiss (it's vice versa) but what was intended is crystal clear. I don't know where you come from but in the UK at least, the term is in everyday use, even amongst the chattering classes. In slang terms Brits often refer to it as vica verka which I probably why I misspelled it. Anyway, don't get precious about your prediction, you be da man!

 

http://dictionary.cambridge.org/dictionary/english/vice-versa

 

 

[Jip99]

7 hours ago, Oxx said:

Which FTSE? The FTSE 100 will respond differently from the FTSE 250, given that the former is primarily international companies whose business will be unaffected by changes in interest rate, but will be affected by changes in exchange rate.  For the FTSE 250 the business will be hit by changes in interest rate, but in most cases less so by changes in exchange rate.

 

Then, there again, markets are far from rational, so which way any index moves is unpredictable.

 

 

Both are up at the moment so it is largely immaterial.

 

Let's see what happens when the announcement comes...............

[chiang mai]

FTSE up 1.31% as of writing, Sterling down by almost 2 cents against USD, an easy call.

[Jip99]

2 minutes ago, chiang mai said:

FTSE up 1.31% as of writing, Sterling down by almost 2 cents against USD, an easy call.

 

 

Yep - together with 1 cent on the Euro and 60 Satang on the Baht.

 

 

Hardy 'factored in' though! 

[chiang mai]

3 minutes ago, Jip99 said:

 

 

Yep - together with 1 cent on the Euro and 60 Satang on the Baht.

 

 

Hardy 'factored in' though! 

 

The markets were expecting "less" and BOE delivered "more", "less" was factored in by the time of the announcement, "more" was not.

 

Tell me that you didn't already understand that before you posted!

 

BTW you conveniently forgot the word "probably factored in".

Edited August 4, 2016 by chiang mai
To teach people how to quote correctly

[Jip99]

1 hour ago, chiang mai said:

 

The markets were expecting "less" and BOE delivered "more", "less" was factored in by the time of the announcement, "more" was not.

 

Tell me that you didn't already understand that before you posted!

 

BTW you conveniently forgot the word "probably factored in".

 

Not sure where you get 'less' from, it was a 95% probability since Tuesday that the rate would be cut 0.25%.

[Naam]

1 hour ago, Jip99 said:

 

Not sure where you get 'less' from, it was a 95% probability since Tuesday that the rate would be cut 0.25%.

i hate when i have to side with Jip99

[chiang mai]

7 hours ago, Jip99 said:

 

Not sure where you get 'less' from, it was a 95% probability since Tuesday that the rate would be cut 0.25%.

 

The market expected a 0.25% base rate reduction (less)

 

What was delivered was a package of stimulus measures, the rate cut being one of them (more).

 

"As part of a four-point package, Carney unveiled additional funds for banks to cushion the blow to their profitability from lower interest rates.

 

• A cut in official interest rates to 0.25%, the first such move since March 2009;

• Plans to pump an additional £60bn in electronic cash into the economy to buy government bonds, extending the existing quantitative easing (QE) programme to £435bn in total;

• Another £10bn in electronic cash to buy corporate bonds from firms “making a material contribution to the UK economy”;

• As much as £100bn of new funding to banks to help them pass on the base rate cut. Under this new “term funding scheme” (TFS) the Bank will create new money to provide loans to banks at interest rates close to the base rate of 0.25%. The scheme will charge a penalty rate if banks do not lend;"

 

https://www.theguardian.com/business/2016/aug/04/bank-of-england-cuts-uk-interest-rates

 

Do you not read the newspapers!

[R123]

FTSE 100 (^FTSE)

-FTSE

6,740.16 105.76(1.59%) 4 Aug 16:35

 

Seems I have an answer , so many thanks to everyone who kindly posted to my original question.

[Jip99]

5 hours ago, chiang mai said:

 

The market expected a 0.25% base rate reduction (less)

 

What was delivered was a package of stimulus measures, the rate cut being one of them (more).

 

"As part of a four-point package, Carney unveiled additional funds for banks to cushion the blow to their profitability from lower interest rates.

 

• A cut in official interest rates to 0.25%, the first such move since March 2009;

• Plans to pump an additional £60bn in electronic cash into the economy to buy government bonds, extending the existing quantitative easing (QE) programme to £435bn in total;

• Another £10bn in electronic cash to buy corporate bonds from firms “making a material contribution to the UK economy”;

• As much as £100bn of new funding to banks to help them pass on the base rate cut. Under this new “term funding scheme” (TFS) the Bank will create new money to provide loans to banks at interest rates close to the base rate of 0.25%. The scheme will charge a penalty rate if banks do not lend;"

 

https://www.theguardian.com/business/2016/aug/04/bank-of-england-cuts-uk-interest-rates

 

Do you not read the newspapers!

 

 

No, I do not read newspapers. I gave up years ago because of the difficulty of finding impartial reporting. I do, however, read online commentary and news reports.

 

Proving liquidity and additional QE was also on the cards. I accept that I did not look at the specifics but it was never going to be just the meaningless 0.25% cut in rates. If the extent of the additional measures caused the markets to react in the way they did then they probably need to sharpen up their research/mole operations.

 

The BoE should never do anything that is a total shock to the market - occasional surprises perhaps in cutting/not cutting rates. But, the obvious flags that are put out should never cause any shock.

[chiang mai]

1 hour ago, Jip99 said:

 

 

No, I do not read newspapers. I gave up years ago because of the difficulty of finding impartial reporting. I do, however, read online commentary and news reports.

 

Proving liquidity and additional QE was also on the cards. I accept that I did not look at the specifics but it was never going to be just the meaningless 0.25% cut in rates. If the extent of the additional measures caused the markets to react in the way they did then they probably need to sharpen up their research/mole operations.

 

The BoE should never do anything that is a total shock to the market - occasional surprises perhaps in cutting/not cutting rates. But, the obvious flags that are put out should never cause any shock.

 

This was no great shock at all, just something the market wasn't expecting, GBP/USD is back where it was the week of 22 July, that's all. A great shock would have been negative interest rates.

[Jip99]

7 hours ago, chiang mai said:

 

This was no great shock at all, just something the market wasn't expecting, GBP/USD is back where it was the week of 22 July, that's all. A great shock would have been negative interest rates.

 

 

I certainly agree with that.

 

The interest rate aspect seems negligible to me. I left my ex-wife in the UK with a mortgage of GBP 185,000 and she will be the grand sum of GBP 38 per month better off. I doubt she will stimulate a High Street spending spree with that.