The British pound jumped, while the FTSE 100 lost some of its earlier gains, as a sharp fall in the UK unemployment rate potentially laid the ground for an earlier end to rock-bottom interest rates than previously expected.
The decline in the jobless rate to 7.1% in the three months to November, down from 7.4%, was much sharper than expected by the City and brings the Bank of England’s 7% target suddenly into view. This is the ‘waypoint’ at which the Bank has said it will consider raising interest rates from their record low of 0.5%.
The pound rose nearly 0.4% to $1.6538 on the prospects of an earlier rate rise.
Offsetting the decline in unemployment though, the minutes from the January Bank of England policy meeting showed that the monetary policy committee sees 'no immediate need' to raise rates if the 7% target is hit in the near future.
The MPC rate-setting committee acknowledged that this target would be hit 'materially earlier' than they had forecast, as they again unanimously voted to hold the base rate at 0.5%. The policy makers have been given more leeway by the decline in inflation to 2%.
James Knightley, an economist at ING Bank, said the probability of an interest rate rise in 2014 was increasing. ‘However, wage pressures remain non-existent and with inflation looking as though it will be well behaved this year the BoE will likely continue to play down the prospect of actual policy tightening until they think this situation is changing.’
The FTSE 100, which had started the day some 0.4% higher, slipped back to near its opening price, at 6,834.
Though the FTSE 100 has only ended lower in two of the last eight trading days – and isn’t far off a 52-week high – its gains have been muted amid concerns about whether company earnings will justify high stock valuations, China’s growth and the path the US Federal Reserve will take towards ending its stimulus scheme.
European markets couldn’t match Asia’s strong showing overnight, with gains of over 2% in China as money market rates continued to drop after the central bank injected cash into markets in an attempt to see off a credit crunch. The Bank of Japan kept its monetary policy unchanged as it concluded its January meeting today.
In London, Admiral (ADML.L) rose 3.2% to £14.61 after analysts at Numis raised the car insurer to a ‘buy’ rating.
Royal Bank of Scotland (RBS.L) fell 2.2% to 350p, making it the biggest loser among blue chips, after UBS cut the shares to a ‘sell’ rating.
Two FTSE 100 firms, Compass Group (CPG.L) and SSE (SSE.L), were trading without their dividend appeal. FTSE 250 companies City of London Investment Trust (CTY.L), IG Group (IGG.L) and Shaftesbury (SHB.L) were also trading ex-dividend.
UK investors will continue their focus on new investment platform charges, as Fidelity follows Hargreaves Lansdown to outline its fees today.
The gold price, which has crept slightly higher so far in 2014, slipped lower, down 0.1% to $1,239 per ounce. Analysts at Morgan Stanley cut their 2014 forecast for the precious metal to $1,160 amid a global economic recovery and demand for riskier assets, such as shares.