Will an interest rate cut have a perceptible impact on the health of the U.K. economy? Might it benefit any particular stock market sectors?
We believe the Bank of England (BoE) is likely to cut interest rates tomorrow and potentially augment that cut with other measures to support the economy. Determining how far to go will be a tough decision for the committee. With the economic shock of the referendum results clearly appearing in the recent sentiment surveys and policy taking a while to have its full impact, they may choose to be aggressive and cut the bank rate to 0%, accompanied by more quantitative easing and support for bank lending. However, it is likely that the survey evidence we have so far overstates the actual hit to the economy, and so a cautious approach with a 25 basis point cut —plus plenty of language about being vigilant over economic risks—is also a perfectly justifiable path to take.
Tomorrow, the BoE does have the ability to assure markets of a post-referendum accommodative stance. The surprise factor in markets is going to be muted, as markets do expect easing, but the pass-through to the economy is what really matters for the health and strength of the UK. Within a few months, we will be able to see if bank and corporates are borrowing more with a lower UK bank rate, and that’s when confidence can actually be confirmed. In summary, we do expect the actions of the BoE to help support UK equities and credit as investors search for yield and return.
The value of the pound is expected to fall as a result of more easing and other non-BoE forces. With that weakening in the GBPUSD rate, the sectors that source most revenues from abroad are set to benefit more than those that are domestically-orientated, as shown in the chart in Alex Dryden’s recent piece on UK revenues: https://uk-edge.centaur.jpmorgan.com/users/15606-alex-dryden/posts/10790-it-s-where-company-revenues-come-from-that-really-counts.
Notes: Unless otherwise stated, all data is sourced by MSCI UK, Citi, and J.P. Morgan Asset Management as at 30 June 2016. Please view J.P. Morgan Asset Management's full disclaimer here: https://uk-edge.centaur.jpmorgan.com/pages/about-jp-morgan-ukedge 0903c02a815eb863