The U.K. stock market is likely to rise over the course of 12 months, if the Bank of England cuts interest rates on Thursday and history repeats itself, according to a CNBC Pro analysis. Economists say the forecasts for whether the U.K. central bank will either reduce or hold rates are a close call. A decision to lower interest rates — which sit at at 5.25% currently — would mark the first time monetary police has been eased in Britain since the hiking cycle began in December 2021. CNBC Pro analyzed stock market data over the past four tightening cycles since 1986 — the earliest date for which FTSE 100 trade data is available. The analysis found that, on three occasions the index had risen more than 20% on average within a year after an interest rate cut. The review also revealed that the FTSE 250 mid-cap index gained by more than 25% on average within a year after a trim. The analysis found that both indexes’ direction of travel for annual returns is also set between three and six months after a rate cut. For instance, the domestically focused index of 250 stocks rose by 17% across three months after the Bank of England cut rates in 1998. The same benchmark was meanwhile up more than 35% around 12 months after the cut. However, the FTSE 100 and FTSE 250 fell a year after the rate reduction of 2007 by 38% and 46%, respectively, due to the global financial crisis. Three months after the cut, both indexes were down by 8% on average on those two occasions. The Bank has historically trimmed rates when the economy was heading into a recession or experiencing a notable growth slowdown. Uniquely, under current conditions, the Bank would be cutting when the economy continues to grow, because inflation appears to have fallen under control. Here’s what some investment banks are forecasting: “Our economists expect a 25bp Bank Rate cut (5-4 vote split) in August, more reflecting a seemingly dovish stance than (mixed) data. It is a close call,” said Bank of America’s Rates Strategist Agne Stengeryte. “In the UK, we continue to see a 25bp cut by the BoE at the August meeting, but see it as a close call,” said JPMorgan Economist Nora Szentivanyi. “Although finely balanced, we expect the MPC to vote 5-4 to cut Bank Rate by 25bp at its August meeting, against the backdrop of a forecast of undershooting inflation in the medium term,” said Jack Meaning, U.K. chief economist at Barclays.
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