FTSE 100 index hits new record on prospect of lower borrowing costs

Anticipation of reduced borrowing costs propelled the UK’s benchmark FTSE 100 index to new record highs on Thursday.

London’s FTSE 100 index advanced by 0.4% to 8,384, taking its gains over the past three months to 10.4%, after the Bank of England announced it would keep interest rates unchanged at 5.25% while hinting at a potential rate cut as early as June.

The Bank of England revised its projections, forecasting stronger economic growth in the UK than previously anticipated, with inflation expected to decrease towards the bank’s 2% target in the upcoming months.

“We need to see more evidence that inflation will stay low before we can cut interest rates. I’m optimistic that things are moving in the right direction”, BoE Governor Andrew Bailey said.

Two MPC members vote for interest rate cut, FTSE 100 index jumps

In a clear sign of a shift to a more dovish stance, two members of the Monetary Policy Committee voted for a 25-basis point rate cut, against the seven who favored no change, surpassing analysts' expectations of only one dissenting vote.

The 2-year UK Gilt yield, highly responsive to shifts in monetary policy, briefly fell below 4.3%, reaching near a four-week low before stabilizing at 4.315%.

The British pound declined 0.2% to $1.2473 against the U.S. dollar, approaching its lowest level since late April, but stabilised in later trading to $1.2500.

The U.S. dollar index (DXY), a gauge of the greenback’s strength against a range of major currencies, declined 0.15% on the day to 105.38. The DXY is up by 4% year-to-date.

Goldman Sachs updates 12-month FTSE 100 index forecast to 8,800

Shares in sectors like utilities, real estate, and home construction, which stand to benefit from lower interest rates, saw increased demand. Resource stocks, a significant component of the blue-chip FTSE 100 index, also gained traction amid optimistic expectations for heightened global demand.

As per a comment from Goldman Sachs cited by MarketWatch on Thursday, the investment bank’s 12-month forecast for the FTSE 100 index has now been updated to 8,800. The analysts said:  

“[W]e remain positive on U.K. equities, as large caps are benefiting from high share buybacks/dividends and continued global cyclical improvement”.

In Germany, the DAX index also hit a record high, increasing by 0.8% to 18,648, buoyed by expectations of enhanced demand from a recovering Chinese economy and an anticipated rate cut from the European Central Bank next month.