Bank of England interest rates up

Bank of England’s base rate increase from 0.25% to 0.5%. Today’s market reaction to the Bank of England’s rate decision shows how difficult it is to judge how events will be received, says Laith Khalaf, senior analyst at Hargreaves Lansdown: The market has delivered yet another salutary lesson on why not to invest on the basis of macro-economic events like an interest rate rise. Even if you guess the right outcome, predicting the effect on asset prices is a different ball game. In theory an interest rate rise should be positive for the pound and the banking sector, and negative for gilts and the FTSE 100. Today the pound fell, as did Lloyds and RBS shares, while gilts and the broader Footsie rallied, turning the investment textbook on its head. This is largely because markets wanted more than a rate rise from the Bank of England today, and were pricing in a more hawkish stance on the future path of monetary policy. As things now stand, it looks like we’re only going to get two rate rises in the next three years. Markets therefore have had to retrace their steps and pare back some of the price movements we have seen in misplaced anticipation of a more hawkish Bank of England.

Looking forward rates can be expected to rise slowly and gradually, unless there is a very negative, or indeed a very positive, Brexit surprise. That will be supportive of equity markets and continue to offer little protection to cash savers from the ravages of inflation. In other words, not that much has changed. For the first time in a decade and the first since the global financial crisis, policy makers will discuss the merits of a rate hike in a bid to prevent inflation moving too far above target. Or at least, that’s what we’re being told despite the acknowledgement that higher inflation is almost entirely down to the one-off currency depreciation that occurred since the Brexit referendum last year. Inflation reached 3% in September, far above the central bank’s 2% target and at the top of the range that the government deems acceptable before Governor Carney must write a letter to the Chancellor explaining why the central bank is failing to achieve its mandated target.