A ‘hawkish’ BoE rate cut
The Bank of England MPC voted 5-4 to cut interest rates by 25bps to 4.25%, with two members voting for a 50bps move, which wasn’t so much of a surprise, but two others voting to keep rates at 4.5%, which was a ‘hawkish’ surprise. The UK and US announced a new trade ‘deal’, the first of many trade deals according to Donald Trump. Equity markets advanced, UK and US bond yields rose quite sharply, and the dollar rose against the euro and sterling though it has since given up some of its gains. EURUSD and GBPUSD are trading at around $1.1250 and $1.3260 respectively this morning, while the pound has fallen back to £0.8490 against the euro from yesterday’s best levels of about £0.8460.
UK and US bond yields rose by 8-12bps as the market pared back BoE and Fed rate cut expectations (in the case of the BoE, by around 15bps to 65bps for the remainder of this year, and by about 10bps to 60bps for the Fed), while German yields increased by 5-6bps. The main US equity indices advanced by up to 1% (led by the Nasdaq), though they finished off their best levels of the day, while European stocks gained more than 1%. Somewhat surprisingly perhaps, UK equities underperformed with the FTSE 100 closing 0.3% lower and the broader FTSE 250 adding about 0.5%.
The BoE in its monetary policy statement said “progress on disinflation in domestic price and wage pressures is continuing”. It noted that “uncertainty surrounding global trade policies has intensified since the imposition of tariffs by the United States”, and “prospects for global growth have weakened as a result” with “negative impacts” on UK growth. It pointed to further rate cuts ahead but, notably, reiterated that “a gradual and careful approach” to lowering rates “remains appropriate”.
As the Financial Times puts it, the new US-UK trade agreement focuses on “cars, cows and crops”. In relation to cars specifically, the tariff on US imports from the UK will be reduced from 27.5% to 10%, though the latter is still considerably higher than the 2.5% in place pre-Trump. The 10% “reciprocal” tariff imposed on the UK on Liberation Day remains in place.
It’s a very quiet end to the week in term of economic data with little or nothing of note due for release today. Trade talks between the US and China are taking place over the weekend, so there may be some headlines for markets to digest at the start of next week.