FTSE 100 rallies after Bank of England hikes 25bps

After falling sharply on Thursday morning, the FTSE 100 staged a partial recovery rally following the Bank of England’s decision to hike rates to 5.25%.

The FTSE 100 was trading down 0.7% at 7,503 at the time of writing – the index had touched lows of 7,437 earlier in the session.

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Housebuilders and banks were among the FTSE 100 sectors that benefited most from the decision announced at noon. The more UK-focused FTSE 250 traded positively as the Bank of England conducted its press conference. Bond markets were little changed.

14th consecutive rate hike

As expected, The Bank of England has voted to hike rates by 25bps to 5.25% in the 14th rate hike in a row in their fight against stubbornly high inflation rates.

The nine-member Monetary Policy Committee was split three ways between voting to keep rates steady at 5%, a 25bps rate hike and a 50bps rate hike. The division highlights the uncertainty about the UK economic outlook and the indecision among policymakers on the best methods to bring inflation under control.

Today’s rate hike is being called a ‘dovish hike’ as far as the BoE did not hike 50bps as they have previously, and the market reaction lowered terminal rates – the highest point rates will rise to in this cycle. Futures markets were pricing two more rate hikes by the BoE shortly after today’s decision.

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“The end of the hiking cycle could now be in sight amid signs inflation has turned the corner, but that doesn’t mean interest rates will start falling any time soon. Irradicating inflation will take patience and persistence from the BoE and households will continue to face higher borrowing costs for some time,” said Rob Morgan, Chief Investment Analyst at Charles Stanley.

The Bank of England’s forecast no longer sees a recession, but these forecasts change regularly, and the ‘long and variable lag’ of interest rates is yet to kick in fully. The risk remains the Bank of England goes too far in its effort to bring inflation under control and tips the UK into recession.

“The UK continues to teeter on the brink of recession. The Bank of England remains committed to bringing inflation down, unfortunately raising interest rates is one of the only tools the Bank can use to sap demand out of the economy,” said Tom Hopkins, Portfolio Manager at BRI Wealth Management.

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