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FTSE 100 feels the pressure of potential interest rate hike

The FTSE 100 fell on Tuesday as the market begins to price in the possibility of higher rates following a period of easy policy designed to battle the economic impact of the pandemic.

Uk jobs data released on Tuesday demonstrated the UK economy was healing quicker than some had predicted, bringing forward the point the Bank of England would be forced to raise rates.

The latest data from the ONS showed that employment figures were back to what they were prior to the pandemic.

“The dials in the labour market are pointing towards an interest rate rise, with job vacancies at a record high, unemployment falling, and the number of payrolled employees back to pre-pandemic levels. The only sign that tightness in the labour market might be easing was the continued fall in average earnings, as base effects start to fall out of the equation,” said Laith Khalaf, head of investment analysis at AJ Bell.

The FTSE 100 reacted the prospect of higher rates with early declines of around 0.9% before recovering through the session.

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“The big squeeze on companies as higher costs take hold has again choked off gains for the FTSE 100, keeping the index down 0.5% by mid-morning. It’s the expectation that the Bank of England will step in to try and squash down inflation by raising interest rates by the end of the year, that’s weighing down stocks, given the financial markets have become so addicted to ultra-low rates and easy financing,” said Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown.

“With vacancies hitting 1.1 million between July and September, the highest level since records began 20 years ago, it’s putting even more pressure on many companies which are already struggling to cope with the tourniquet of higher energy costs and supply chain problems.”

“As the labour market tightens again, the fight for staff is increasing, with starting salaries rising at the fastest rate in 24 years.  Although it signifies that pandemic recovery is continuing and demand is back, businesses can no longer turn on the easy taps of labour from the European Union to ease labour shortages. With oil and gas exploration limited as the transition to renewables is stepped up, energy prices look set to stay elevated, with Brent crude rising above $84 a barrel earlier, a three year high.”

The fears led to broad declines in most sectors and IAG was the biggest faller around midday on Tuesday.

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