LSE stocks nosedive as the BoE keeps the interest rate untouched

Summary

• FTSE 100 dropped by 1.71 per cent after the Bank announcement
• Interest rate retained at 0.1 per cent
• BoE expects CPI inflation rate to hover around 0.25 per cent for H2 2020
• It forecasted an unemployment rate of 7.5 per cent for the year 2020

In line with market speculations, the Bank of England (BoE) left the official bank rate unchanged at 0.1 per cent on 6 August 2020, to aid the country’s economy in recovering at a fast pace. It also hasn’t tinkered with its target of £745 billion to purchase corporate as well as government bonds. However, it is expected that the Bank might expand its quantitative easing stimulus by another £250 billion by the end of 2021.

The last BoE announcement came on 7 May 2020, when the interest rate was kept at the same level of 0.1 per cent.

While in May 2020, the BoE had estimated the UK economy to grow by 15 percent for the year 2021, the economic experts are now are projecting this growth rate to be merely 6.5 per cent for 2021. This means that the British economy could be growing slower than expected during the next year.

At the same time, the economy may not shrink as sharply as expected earlier during Q2 2020. In May 2020, BoE forecasted the country’s total output to fall by 25 per cent for the second quarter. However, now the expert estimates expect the British economy to decline by close to 20 per cent for the Q2.

Trend in the official bank rate set by the Bank of England

(Source: Bank of England, UK)

The Bank of England has been gradually lowering the bank rate over more than a decade now.

On 5 July 2007, the rate was hovering at a high level of 5.75 per cent per annum. It was dragged down to 5 per cent (on 10 April 2008), then to 2 per cent (on 6 November 2008), and was further lowered to 1 per cent on (5 February 2009). These were the times of the great financial crisis and the British economy was slowing down drastically. Hence the Bank wanted to revive corporate borrowings and investments with these reductions in the interest rate.

The bank lowered its key rate further to 0.5 per cent on 5 March 2009, which continued to remain at the same level for the next few years, when it was further pulled down to 0.25 per cent (on 4 Aug 2016). It was then gradually raised to 0.75 per cent on 2 August 2018. However, after the coronavirus struck the economy and led to a deep slowdown, it was pushed down to 0.25 per cent on 11 March 2020, and even further to 0.1 per cent on 19 March 2020 to improve corporate borrowings and push up the economic activity in recessionary times.

Inflation and unemployment forecasts by the BoE

The Consumer Price Inflation (CPI) rate was estimated to be 0.6 per cent in Q2 2020, as per the latest UK government statistics. The BoE expects it to fall further to 0.25 per cent for the period of H2 2020.

The Bank expects the unemployment rate to rise to 7.5 per cent for the year 2020, compared to the existing government estimates for the same at 3.9 per cent.

Market Reaction

After the UK’s Central bank’s announcement came in, the stocks nosedived at the London Stock Exchange (LSE). The FTSE 100 index crashed by 1.71 per cent to reach 6,000.45 points on 6 August 2020 at 1.22 PM. The index’s 52-week low / high range stood at 4,993.89 / 7,674.56.

A similar trend was seen in the FTSE 250 index, which was trading at 17,420.74, down by 1.23 per cent on 6 August 2020 at 1.24 PM.

Talking about the top losers on the FTSE 100 index, Glencore Plc (LON:GLEN) tumbled to GBX 185.66, down by 5.37 per cent on 6 August 2020 at 10.30 AM. The mining major had also announced on the same day that it is scrapping payment of dividend for the year 2020.

Rio Tinto (LON:RIO) stock sunk by 5 per cent to reach a level of GBX 4,708.50 on 6 August 2020 at 10.34 AM. On 29 July 2020, the company had declared its H1 2020 results. Its underlying profits or EBITDA shrank by 6 per cent for the six months and reached a value of $9.6 billion.

BAE Systems Plc (LON: BA.) plunged by 3.81 per cent to reach GBX 508.60 points at 10.37 AM on 6 August. Few days back, the company had announced that its $15 billion army vehicle program is being delayed for five months, as a result of the coronavirus pandemic.

Land Securities Group (LON:LAND) slumped by 2.98 per cent to reach GBX 591.80 points at 10.41 AM on 6 August. The group is into commercial property developments across the UK.

SEGRO Plc (LON:SGRO) share price went down to GBX 959.2 by 2.88 per cent on 6 August 2020. The company had raised its dividend by roughly 10 per cent, backed bya strong logistics demand.

BP Plc (LON: BP.) stocks plummeted by 2.59 per cent to reach GBX 298.70 at 10.43 AM on 6 August 2020. Recently, the company also halved its dividend while releasing its Q2 2020 results.

As a summary, the Bank of England’s much awaited announcement on the interest rate came in on 6 August 2020. As expected by market analysts, the central bank retained the official bank rate at 0.1 per cent. However, probably the markets had other hopes. The FTSE 100 index plummeted by 1.71 per cent on the same day. Maybe investors would have been happier to see the Bank’s interest rate walk into negative territory for the first time in British history, and a consequent upturn in borrowings and investments across the economy. It is yet to be seen if the economy actually recovers back to a positive growth in 2021, as is being projected by the bank.