At noon today, Mark Carney did what so many market participants had expected since the result of the EU referendum was announced, and cut interest rates, from the previous 0.5 per cent, to 0.25 per cent.
A cut in interest rates would be expected to push the value of the pound down, and so inflation upwards.
That would normally be expected, according to Peter Elston, chief investment officer at Seneca, to push up the cost of living for households.
Mark Carney will be hoping that consumer spending will rise, with the damage caused by the extra inflation mitigated by the lower mortgage costs. If consumers are spending less servicing their mortgage, then they have more cash to spend on consumer goods.
Russ Mould, investment director at AJ Bell commented that if Carney’s theory works, then the shares of companies that rely on advertising, such as Sky and ITV will do well, because advertisers will spend more if they think consumer spending is on the rise.
Mould added that the UK house builders might also expect to benefit. This is because lower interest rates should , if Carney’s theory is correct, translate into cheaper mortgages.
That would be likely to prompt an increased level of house buying. The counter argument to this is that if inflation were to get particularly high, then the capacity of people to save money for a deposit would be reduced, while those already with fixed rate mortgages will find repayments harder to make. Were either of those trends to become significant, then demand for housing would likely fall, and be bad for the house builders.
But this scenario is unlikely to play out, according to Elston, who remarked that the underlying level of inflation is sufficiently low in the UK right now, that a particularly sharp spike is unlikely.
He added that while the weaker pound may put a peg on the level of consumer demand within the UK, it will benefit exporters, so UK exporting company shares may see a bounce.
Mould added that defence contractors, oil companies and miners may benefit from this.
An immediate reaction to the rate cut was a fall in the yield on ten year UK government bonds.
Falling bond yields have, up to now, resulted in a surge in the share prices of large, defensive shares. This is because bond investors, unable to get the income they want from their favoured market, move into what they perceive to be the safest shares. Consumer staple stocks include Unilever.