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The Bank of England (BoE) is the central bank in the UK. As stipulated in its official duties, this bank contributes to a healthy British economy by striving to promote and maintain monetary and financial stability. The European Central Bank (ECB) on the other hand, is charged with administering the monetary policies of the 17 EU Eurozone member states.
Merely looking at the scope of their respective operations, one can clearly see that stock trades andother financial market transactions are highly subject to the decisions and policies made by both the Bank of England and the European Central Bank.
Of paramount significance is the fact that the BoE and the ECB can both adjust interest rates on bank-to-bank loans in the respective territories under their jurisdiction. And interest rate adjustments affect borrowing costs of corporations, as well as their profitability.
Although interest rates do not directly affect the stock market, increases and reductions in interest rates do bring about a sort of ripple effect that ultimately spreads into the market. For instance, the higher interest rates are, the more expensive it is for businesses to take out operational loans and other needed credit facilities. Also, in addition to increasing borrowing costs, adverse movements in interest rates can equally reduce financial service providers’ profitability, reduce returns for investors, and reduce the net present value (NPV) of organizations.
And considering the fact that corporations’ borrowing costs and profitability largely affect their stock prices, one can rightly say that the decisions and policies made by the Bank of England and the European Central Bank have a major bearing on stock markets in the UK, Europe, and the world at large.Moreover, corporations’ Net Present Values (NPVs), which are also affected by movements in interest rates, form one of the primary bases on which stock valuations and prices are typically computed or arrived at. Thus any seemingly unfavorable policies or decisions these bodies make with respect to interest rates tend to make stock trades less profitable, and stock markets less attractive.
Not too long ago as a matter of fact, stock markets in Europe were virtually at a standstill simply because the BoE and the ECB kept their respective interest rates on hold in the face of an attendant increase in US jobless claims. This goes to show just how much of an impact the Bank of England and the European Central Bank can have on stock markets in the UK. Thus the question to answer here is how best both regulatory organizations can effectively structure their policies and decisions so as to guarantee consistent optimum performance in UK stock markets.
