Markets rose yesterday after the US Federal Reserve signaled that the rate hike cycle was likely to end – and despite the Bank of England sounding a warning.
London's FTSE 100 index rose more than 2 percent in early trading to hit its highest level in almost three months, but later ended down 1.3 percent, or 100.54 points, at 7,648.98 after the rally retreated as Bank Governor Andrew Bailey pushed back on hopes for rate cuts.
US indices also led in early trading, building on the previous day's gains in the wake of the Fed's comments, which analysts said represented a long-awaited pivot.
And the pound was pushed to a four-month high against the US dollar, to just below $1.28, on the likelihood that the US central bank will start cuts before the Bank of England.
It was a choppy session for UK bonds, with 10-year government bond yields falling below 3.7 percent to their lowest level since May before returning to their previous position. The interest rate on bonds falls as their price rises.
The FTSE 100 rose more than 2% in early trading but later finished 1.3% higher after the rally retreated after bank governor Andrew Bailey pushed back on interest rate cut hopes
The rally was fueled by comments from Fed Chairman Jerome Powell a day earlier that interest rates in the world's largest economy were at or near their peak and that rate setters were beginning to debate when to start cutting.
Chris Turner, global head of markets at ING Bank, said the Fed has “poured fuel on the fire to ease expectations for 2024.”
Some of the intensity was taken out of the rally by the Bank of England, as was caution from European Central Bank (ECB) President Christine Lagarde.
Bailey said: “We have come a long way this year. But there is still a way to go.”
At the ECB, where interest rates were also left unchanged, Lagarde said: 'We should absolutely not let our guard down. We haven't discussed interest rate cuts at all.'
Danni Hewson, head of financial analysis at AJ Bell, said: 'The Bank of England may not have given the markets the kind of Christmas present that Jerome Powell did, but… nothing could take the tension out of the markets.' The Fed's rhetoric will likely put pressure on the Bank of England to take action as well.
Markets yesterday were pricing in a 70 percent chance that the Bank could cut rates in May next year, and an almost one-in-three chance that this would happen as early as March.
Martin Weale, a former member of the Bank's Monetary Policy Committee (MPC), told Bloomberg: “There is still a long way to go, but if the Fed cuts rates it will exert a pull that the BoE would prefer.” . do without.'
Threadneedle Street officials – like the Fed – voted to leave interest rates unchanged.
But the wording was much more circumspect, warning that some inflationary pressures, such as wage growth, were stronger in Britain than in other advanced economies.
And while the majority of the nine members of the MPC voted in favor of leaving interest rates unchanged, three argued for an increase and cuts were not even discussed.
The Bank has raised interest rates to 5.25 percent to reduce inflation, which fell from 11.1 percent to 4.6 percent last fall.
But the aim is a level of 2 percent. And inflation levels in Britain are significantly higher than in the US, where they have now fallen to 3.1 percent.
The Bank said interest rates should remain high “for an extended period of time.”