UK Shares React to BoE Rate Decision and U.S. Federal Reserve Cut

UK shares dipped after the Bank of England held rates as expected and extended its bond reduction plan. The FTSE 100, mid-caps, and small-caps experienced gains before the BoE decision. BoE policymakers indicated patience toward rate normalization, affecting future interest rate cut expectations.

On Thursday, UK shares fell from session highs as the Bank of England kept interest rates unchanged and extended its bond reduction strategy, aligning with market expectations.

The FTSE 100 saw a 1% increase, mid-caps rose by 1.2%, and small-caps gained 0.5%. Prior to the BoE announcement, the benchmark index had surged by as much as 1.3% buoyed by a significant 50-basis-point rate cut from the U.S. Federal Reserve.

The British pound reached its highest level since March 2022 post-decision, exerting pressure on the FTSE 100's export-focused companies. BoE's Governor Andrew Bailey cited easing inflation pressures as a factor that might allow for gradual rate cuts in the future. Still, traders reduced their expectations for a November rate cut, now seeing a 66% probability. The BoE also voted to reduce its stock of British government bonds by 100 billion pounds over the coming year while continuing to tackle rising inflation, especially in the services sector. UK rates are anticipated to decline more slowly compared to the euro zone and the U.S., where the Fed had eased rates by 50 basis points intending to support the labor market amidst decreasing inflation pressures. Despite these changes, UK stocks continue to underperform compared to other developed markets, with the FTSE 100 up 7.7% year-to-date versus S&P 500's 17.8% and STOXX 600's 9% gains.

Most FTSE sector indexes traded higher, with the personal goods sector leading the gains.

(With inputs from agencies.)