Uncovering the impact of a potential 2024 interest rate cut by Bank of England

The financial landscape is ever-changing. One significant contributor to these changes is the fluctuation of interest rates set by central banks. In 2024, the Bank of England (BoE) is projected to cut interest rates, a move that could significantly impact the UK's economic environment, the stock market, and the value of the British pound.

This article explores the potential implications of such a shift, examining the technical standpoint, the political landscape, the economic growth forecast, the government's debt, the property market, and the labour market, among other areas.

Technical analysis - Currency & stock market

• GBP/USD pair

The GBP/USD pair's weekly chart indicates overbought conditions, with the 60-week moving average providing support around 1.2350. Interestingly, this moving average has been largely flat since November 2022, hinting at limited potential for further GBP gains. Instead, the market could shift towards safe-haven currencies like the USD, possibly leading to its resurgence.

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• FTSE100

In terms of the stock market, the FTSE100 (UK_100) has been undergoing a period of sideways movement. Although the Stochastic indicator isn't currently in an overbought zone, it's rather close, suggesting the possibility of a breakout. However, given the somewhat uncertain economic conditions in the UK, a downward breakout might be more likely in the event of further economic deterioration.

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Political landscape and GBP

Politics often play a significant role in shaping a country's economic outlook and, by extension, its currency value. In the case of the UK, Prime Minister Boris Johnson has seen a decline in his approval rating, as per Conservative Home, putting significant pressure on Chancellor Rishi Sunak.

In the past, significant fluctuations in the GBP/USD pair have been noted ahead of changes in the Prime Minister's office. With an election due no later than January 2025, political uncertainties could have a substantial impact on the GBP's trajectory.

UK economic outlook

Given the political situation, the economic outlook for the UK is of paramount importance. As of the third quarter of 2023, the UK economy has experienced stagnant growth, with a GDP increase of 0%. Inflation stands at 4.6%, and the BoE benchmark rate is at 5.25%.

The manufacturing and service sectors, traditionally strong contributors to the UK economy, show mixed figures. The S&P Global/CIPS UK Manufacturing PMI for November 2023 was revised upward to 47.2, surpassing the initial estimate of 46.7 and October's 44.8. However, the S&P Global/CIPS UK Services PMI was only slightly revised upward to 50.9 in November 2023, compared to the preliminary estimate of 50.5 and October's 49.5.

Government debt

The UK government's debt-to-GDP ratio has reached 100.1%, necessitating serious considerations for austerity measures, tax increases, or cuts in social expenditures. A sluggish economic growth could result in an increase in this ratio and lead to further debt accumulation.

Property market

The property market is showing signs of slowing down, with transaction estimate volume down 15% from the average. If high-interest expenses start impacting the housing market, it could destabilise the UK banking sector, resulting in an increase in non-performing loans, stricter lending policies, and potential repercussions on house prices and overall bank asset quality.

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Labour market

Since 2011, the UK has seen a steady increase in the employment rate until the onset of the COVID-19 pandemic. However, during the May-July quarter, the unemployment rate rose to 4.3%, up from 4.2% the previous month and 3.8% in the preceding quarter.

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In conclusion, the potential interest rate decrease by the BoE in 2024 could have profound implications. While it might ease some debt burdens, it could also negatively impact the FTSE100 and the GBP. Further, political uncertainties could potentially weaken the GBP even further. It is essential for investors and market participants to keep a close eye on these developments.