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The Bank of England Monetary Policy Committee is responsible for setting and adjusting interest rates. It does this when the team meets, usually once a month. UK shares are volatile around the meeting dates, reacting to the news.
Given my view of interest rate cuts this year, here are three stocks that I think could do extremely well.
Consumers loosening the belts
The first one is JD Sports Fashion (LSE:JD). The stock is down 28% over the past year, with the bulk of this move coming in just the past month. This can be blamed on a poor holiday trading update, in which the management team spoke of “more cautious consumer spending”.
In my eyes, that ties in with the impact of high interest rates, putting pressure on housing costs and other bills.
Looking forward, if we get a move lower in interest rates this year, the opposite should happen. Customers will feel more confident about spending, given lower expenses and more optimism about the future.
Given that JD Sports sells to the public, this is an area that should be very sensitive to interest rates. Therefore, I’d expect financial performance for the company to improve in this coming fiscal year.
More demand from housing projects
Another similar case is Kingfisher (LSE:KGF). The DIY retailer issued a profit warning back in November. Even though most of the underperformance came from Europe (excluding the UK), the UK market isn’t growing at the pace it has in previous years.
I think a large factor here is the impact of high interest rates. With fewer people able to afford a mortgage, home improvement project demand has shrunk. Even for those that do have a property, higher housing costs likely have caused some to push back projects in the home.
Should the central bank cut rates this year significantly, I believe Kingfisher could see a surge in demand. In a similar way to JD Sports, I believe Kingfisher customers will have newfound optimism about their future financial position. This should cause more to commit to DIY jobs, including purchasing products from Kingfisher brands.
Restructuring debt
Finally, consider Rolls-Royce (LSE:RR). I know the stock is very popular at the moment thanks to the 184% rally over the past year. Yet my case for it to appreciate further is based around lower interest rates.
Due to the pandemic hit, the company took on large amounts of debt. It still has a large debt pile, standing at £2.8bn as of the half-year results.
Given the improvement in free cash flow and general profitability of the firm, it’s in a position to really improve the overall financial position. New debt could be taken on at cheaper levels if interest rates fall. Old debt at expensive rates can be paid off due to the improving cash flow. This swap would help to lower overall debt but also lower the interest costs going forward (if the central bank does indeed reduce the base rate).
The risk to all three ideas is that the Bank of England keeps the base rate higher for longer. This could be due to a spike in inflation. In that case, all three stocks could underperform.
