The Bank of England (BoE) will announce its latest decision on interest rates on 1 August. There’s no guarantee a cut will finally come, but certain UK shares could respond very positively if it does.
Inflation ‘on the ropes’
One reason for thinking a cut will arrive is that inflation’s come down by so much. The last two readings (May and June) came in at 2% — in line with the BoE’s long-term target and a far cry from the 11.1% hit in October 2022.
Another (more speculative) reason for thinking BoE governor Andrew Bailey and co might finally act is that the general election’s now behind us. Perhaps, understandably, the bank might have wanted to avoid any accusations of political bias during the campaign.
Now that’s all done and dusted, I imagine a lot of business leaders will be pushing for no further delays, especially as UK economic growth forecasts have also been improving.
What could do well?
Predicting which companies might do well in a lower-rate environment’s speculative. But we do have the past to fall back on.
Consumer discretionary stocks have tended to fare well. A lowering of rates make it more likely that shoppers will gradually begin treating themselves again. Utility stocks — and anything that has substantial maintenance costs — also benefit since repayments on debts are lower. The same goes for growth stocks that require lots of funding to make it to breakeven and beyond.
Another beneficiary should be the property sector. My investment in housebuilder Persimmon (LSE: PSN) means this is one part of the market that I’ll be watching like a hawk next month.
Why? Because the expectation is that lower interest rates will lead to better mortgage availability for buyers, particularly those looking to secure their first home. Overseas investors could also get excited and help to shake the cobwebs from a languid UK property market.
Hold your horses
An easily-spotted issue with the above is one I’ve already mentioned, namely a cut may be postponed (again).
Even if interest rates do fall, there’s an argument for thinking at least some of the potential uplift in sentiment’s already been priced in. As I type, Persimmon shares are up 9% year-to-date and yet its trading updates have been pretty tepid affairs. The stock trades at nearly 19 times forecast earnings too.
There’s also a chance that inflation could move back up in what remains of 2024. Should this be the case, the BoE may refrain from cutting further and even raise rates again. At the very least, this could place a ceiling over UK share prices for a while.
Who cares?
Does any of this matter to a Fool like me? Not really. As much as I’d like to see stocks like Persimmon do well over the next few months, my focus is always on the long term. Based on the ongoing shortage of quality housing in the UK, I think the firm’s outlook remains solid whatever the BoE does in the immediate future.
Rather than get nervous about next month’s decision, my priority is to funnel any spare cash I can find into my Stocks and Shares ISA at the earliest opportunity.
