Traders have increased their expectations for a Bank of England interest rate cut in August, boosting the pre-election rally in UK shares and government bonds.
Following the Bank of England's anticipated decision, the institution hinted at the possibility of a rate cut, causing money markets to raise the likelihood of an August rate cut to 44%, up from 32% the previous day. The probability of a rate cut in September is now estimated at 90%.
Data released on Wednesday showed UK inflation falling to the Bank of England's 2% target, reinforcing these expectations.
Investors now view potential rate cuts as a stimulus for the UK economy, especially amidst forecasts of a significant decline in the opposition Labor Party's popularity in the upcoming July 4 election, which promises to revive economic growth and manage public finances responsibly.
This is a crucial moment for British markets, which have been battered by Brexit in 2016 and the underfunded 2022 mini-budget proposed by former Prime Minister of the United Kingdom and Leader of the Conservative Party Liz Truss.
Economists polled by Reuters expect the UK economy to grow 0.7% this year, an improvement on previous forecasts that placed Britain at the bottom of the developed world's growth chart for 2024.
Becky Qin, a multi-asset portfolio manager at Fidelity International, mentioned that she would remain neutral on UK shares until there are further signs of sustained economic growth. Although UK markets are rising, there are few indications of long-term support. Tracker funds offering low-cost exposure to British stock indexes have attracted new money in three of the last four weeks since Prime Minister Rishi Sunak called an election, according to Lipper Global.
Actively managed UK equity funds, which involve long-term commitments due to higher fees and promises of greater returns over time, have experienced outflows in recent weeks, a trend that has persisted for years.
Overall, investor sentiment towards the UK remains optimistic as hopes of a rate cut contribute to the pre-election excitement.
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