The FTSE 100 gave up ground on Wednesday as the market digested inflation data that makes it near impossible for the Bank of England to avoid hiking rates in December.
UK inflation was 4.2% in October, the highest rate in nearly a decade and a level that will start to seriously impact household spending power if inflation isn’t addressed in the short term.
“Inflation at a 10-year high of 4.2% makes for uncomfortable reading and goes to show the punishing effects of higher energy and food prices on family finances. It almost certainly means the Bank of England will raise interest rates soon, potentially as soon as next month,” says Russ Mould, investment director at AJ Bell.
The Bank of England said they wanted to see further evidence of a healthy UK economy before moving on rates. Today’s inflation data and strong jobs data yesterday does just that.
With investors pricing in the chances of higher rates, the pound gained and hit shares earning significant revenue overseas. Names such as Shell, BHP, Vodafone and Unilever were all weaker.
The FTSE 100 traded at 7,309, down 0.2% as we approaching midday in London.
“The prospect of higher rates has given some support to the pound, but the movement is only mild which suggests that rising inflation is a surprise to no-one. Sterling gained 0.1% against the US dollar at $1.3440,” Russ Mould said.
“What really matters to markets is the scale of any interest rate hikes over the next year, and that will be guided by the longevity and ferocity of inflation. There is a real chance that rates keep going up by small increments and after a while this starts to make life more difficult for consumers and companies as the cost of borrowing becomes more expensive.
Mould also highlighted the strength in UK banks this morning and the benefits associated with higher rates for banking profits.
“NatWest and Lloyds were among the biggest risers on the FTSE as the banking sector should be a beneficiary of rising interest rates. It creates scope for them to increase net interest margins which is the difference between the interest they earn on loans and the interest they pay on savings deposits,” said Mould.
