The Bank of England have moved to increase rates by 0.5% to 3.5% as expected and taken rates to the highest level in well over a decade.
The BoE followed the US Fed in moving rates higher by 50 bps as inflation rates start to fall, but remain at historically high levels and pile pressure on household spending.
The FTSE 100 was trading down 0.4% at the time of writing with consumer shares leading the losses.
Falling inflation has reduced the trajectory of interest rates which has been welcome news for equity markets that have largely priced in slower rate hikes.
However, inflation remains persistently high and further rate hikes are expected in early 2023.
“Since the last Monetary Policy Committee Meeting in early November, pressure on the Bank of England to maintain market confidence has abated somewhat and, while further rate rises are priced, the extent of further rises expected has fallen dramatically compared to those seen in the wake of the now infamous “mini” budget,” said Chris Arcari, Head of Capital Markets, Hymans Robertson.
The FTSE 100 was trading down 0.4% at 7,461 shortly after the announcement but has staged a significant rally since October. GBP/USD was down 0.9%.
Despite inflation rates falling, there is a consensus building that even if rate hikes slow in their pace, rates will remain at elevated levels for some time to come. Fed chair Jerome Powell alluded to an extended period of high rates overnight in the US.
“Judging by the market’s reaction, there’s plenty of smart money out there that thinks the most likely scenario is that rates are higher for longer. That means a deeper recession next year that could blow into 2024,” said Samuel Fuller, Director of Financial Markets Online.
Consumer shares were among the biggest faller following a poor set of results from Currys. There was very little movement in FTSE 100 constituents as a result of the rate hike but analysts highlighted the ongoing plight for consumer shares with high rates and rising prices.
“Even with an increase in rates, when coupled with sky-high inflation, anyone with cash or near cash savings will see their money being eroded in real terms. And this is likely to be felt more acutely by pensioners who are likely spend a higher proportion of their cash savings on energy bills,” said Les Cameron, savings expert at M&G Wealth.