Rate cut market rally quickly losing steam

“The Bank of England’s decision to cut UK interest rates to a record low 0.25% has fired up the FTSE 100 and European markets,” says Russ Mould, Investment Director at AJ Bell.

“Lower rates push more savers and investors towards equities in the search of better returns and the Bank’s actions also give businesses more support during a difficult time for the economy.

“The Budget later today should give more information about how the Government plans to help businesses and consumers, so combined with the Bank of England’s actions we’re getting much more clarity on the scale of stimulus efforts.

“A rate cut is unlikely to be enough on its own to stop the UK from experiencing a significant economic dent. Low borrowing rates won’t necessarily get worried consumers spending again if they are cautious about going outdoors or are even forced to stay inside because of coronavirus-related issues.

“However, a rate cut is arguably good for some of the heavily-indebted companies on the stock market as markets may assume they could refinance on more favourable rates. That might explain why Tullow Oil was one of the top risers, up 5.7%.

“It would also be good news for people looking to move home as rates on certain types of mortgage deals should quickly come down, making them more affordable. Housebuilders are natural beneficiaries, hence why Persimmon jumped 4.3% and Barratt Developments advanced 3.9% on Wednesday morning.

“A rate cut also makes it cheaper for companies to borrow money to spend on making their business more competitive which can include expansion and hiring more people.

“Sadly the coronavirus factor puts a spanner in the works and will create uncertainty as to when businesses and consumers are going to get back to normal life.

“Just look at the US market rally post the Federal Reserve’s rate cut on 3 March – it didn’t last long as investors quickly shrugged off the stimulus effort. Today the FTSE 100 jumped 1.8% in the first 15 minutes of trading but then started to drift back.

“Elsewhere, oil prices slipped 0.1% to $37.18 per barrel amid talk that oil producer Saudi Aramco had been ordered by its government to boost output. And gold prices ticked up 0.8% to $1,663 per ounce.”

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