Early Rate Rise Hint Spooks Market

Published / Last Updated on 08/02/2018

Consumer Spending SlowdownThe Bank of England today held interest rates at 0.5%pa but offered huge hints that they would consider bringing interest rate rises forward.  In addition, they hinted that rate rises may be higher than expected.  This spooked markets with FTSE 100 and European markets all falling.

Whilst not as dramatic as the US market correction on Monday, with fears their that interest rates will rise more quickly given better than expected job figures, it still set markets into losses.

Here are some snippets from the Bank of England's message today:

  • "The economy now needs a little less support.  We cut interest rates to exceptionally low levels during the financial crisis to support spending and to reduce the number of people out of work."
  • "The economy is strong enough for us to remove some support".
  • "Our  job is to meet the 2% inflation target. Inflation is currently above that target, because of the big fall in the pound following the Brexit vote."
  • "The squeeze on pay is easing.  Over the past year, prices have been rising faster than wages.  That means people have not been able to afford as much. We think that is changing."
  • "We think that pay will rise faster than prices this year".
  • "To make sure inflation falls back to our 2% target, we need to set interest rates so that the amount of spending in the economy isn't too low or too high."
  • "If we set interest rates too low, then growth in the economy will be too fast, and inflation will stay above our target."

Comment

Expect earlier interest rate rises, perhaps in April or May.  Expect the £ to strengthen.  Profits of FTSE 100 companies that earn money overseas and convert back to a potentially stronger £ will mean profit falls in sterling terms.  Hence the dip in markets. 


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