Bank of England signals rate hikes
At its September meeting, the Bank of England left the benchmark interest rates unchanged at 0.25%. The targets for the bond-buying program were left unchanged at 435 billion pounds and 10 billion pounds for government and corporate bonds, respectively. The decision to leave rates unchanged was made with a vote of seven to two. The surprise, however, was the warning that there could be a rate hike over the coming months.
Why was this warning a surprise?
Markets aren’t pricing in any rate hikes from the Bank of England at least until the Brexit negotiations take shape. The uncertainty over the terms of Brexit and the possible political fallout from the same was expected to keep the UK interest rates near the historical low of 0.25%.
Market reaction to the BOE
British equity markets (EWU) turned negative in response to the hawkish BOE. The FTSE 100 Index is headed for a weekly close of 2.3%. The reason the FTSE could trend lower is that most of the companies in the FTSE 100 are net exporters. An appreciating pound (GBB) would impact the profit margins of these companies and thus could cause the index to fall. The British pound (FXB) rallied against the US dollar (UUP) and the euro (FXE), as a rate hike would make the British currency attractive.
In the next part of this series, we’ll take a closer look at inflation and unemployment data in the UK.