Interest rate hike could be lower than expected as markets rally

The financial markets have responded positively to Boris Johnson pulling out of the Tory leadership race and Rishi Sunak becoming prime minister.

The FTSE 100 started the day yesterday with a 0.5% increase, pushing it above the 7,000-point mark for the first time in a week, while the pound rallied higher at $1.13. And while those gains lessened as the day continued, there is now a broad expectation that a future rise in interest rates will be lower than previously forecast.

Financial analysts are hopeful that former chancellor Sunak, now the next prime minister, could help fix the UK finances which have taken a hit over the past month or so.

Markets are now expecting the Bank of England to set interest rates at slightly less than 5%, lower than the 6% expected in the weeks following the mini-Budget.

That lower expected rate is likely to mean cheaper mortgage repayments for homeowners.

The cost of government borrowing also dropped yesterday. The interest rate repayments the government has to pay on the money it borrowed on the market fell from 4.1% to 3.8% in its 10-year benchmark bonds, effectively state IOUs.

While some of those gains were lost by late morning, afternoon bonds were firmly back at pre-mini-Budget levels.

SOURCE: Property Industry Eye | OCTOBER 25, 2022 | MARC DA SILVA