European stocks climb, pound plunges after Bank of England action

A sign is displayed outside the Bank of England in London, Aug 4, 2016.
A sign is displayed outside the Bank of England in London, Aug 4, 2016.PHOTO: REUTERS

LONDON (AFP) - European stocks shot higher and the pound plunged after the Bank of England cut interest rates and announced an additional £170 billion (S$228 billion) of stimulus to counter Brexit fallout.

The BoE slashed interest rates to a record low 0.25 per cent, cutting borrowing costs for the first time in more than seven years, and hinted at more easing to come.

Britain's central bank aims combat what it described as a weaker economic outlook after British voters chose to leave the European Union in a June referendum.

The rate move had been expected, but there was surprise when BoE policymakers also voted unanimously for an emergency package worth up to £170 billion, including £60 billion for more quantitative easing (QE).

"The Monetary Policy Committee decided to implement more policy action than we expected," Ken Odeluga, market analyst at CityIndex, said.

London's FTSE 100 index, which had been wobbling beforehand, stormed higher and closed 1.6 per cent higher.

The pound fell against both the dollar and the euro while rates of return on British government bonds sagged.

In the euro zone, the Frankfurt and Paris markets also rose, but their closing gains were well behind London's.

"BoE gets creative in response to Brexit shock," Kallum Pickering, an economist at Berenberg, headlined a note to investors.

Simon Wells at HSBC said the package may "support confidence" although he wondered "whether all this QE will have a significant impact on the real economy".

Michael Hewson at CMC Markets said the Bank may have overreacted to the Brexit shock, possibly without making much difference to the economic outlook.

"It could turn out to be the monetary equivalent of dropping the sledgehammer on one's toe," he said.

Wall Street was mostly unchanged, shrugging off the British rate move.

The US market's muted reaction reflects misgivings that excessive central bank policy is "driving investors into riskier assets," said analyst Patrick O'Hare.

The rate cut was the first since March 2009, when the bank slashed rates to the current historic low of 0.50 per cent at the height of the financial crisis - and launched its QE policy of buying government bonds to push investors to reinvest funds in the economy.

Earlier, Asian stocks rose following a positive lead from Wall Street, as investors look ahead to both the BoE and US jobs data.

A better-than-expected reading on US private jobs supported a Wall Street rally, with payroll firm ADP reporting that private US companies added 179,000 jobs in July, slightly better than expected.

The US is due to announce official job creation data for July on Friday, with markets looking for signs that could increase the likelihood of a hike in US interest rates.

Shanghai ended up 0.1 per cent as investors await the release of economic data next week, including on trade, investment and retail sales.

London - FTSE 100: UP 1.6 per cent at 6,740.16 points (close)

Frankfurt - DAX 30: UP 0.6 per cent at 10,227.86 (close)

Paris - CAC 40: UP 0.6 per cent at 4,345.63 (close)

EURO STOXX 50: UP 0.6 per cent at 2,929.40

New York - DOW: FLAT at 18,355.00

Tokyo - Nikkei 225: UP 1.1 per cent at 16,254.89 (close)

Shanghai - Composite: UP 0.1 per cent at 2,982.43 (close)

Hong Kong - Hang Seng: UP 0.4 per cent at 21,832.23 (close)

New York - DOW: UP 0.2 per cent at 18,355.00 (close)

Euro/dollar: DOWN at US$1.1132 from US$1.1148

Pound/dollar: DOWN at US$1.3129 from US$1.3316

Pound/euro DOWN at 1.1795 euros from 1.1952

Dollar/yen: DOWN at 101.09 yen from 101.25 yen