Another month, another interest rate rise from the Bank of England, which seems intent on quashing the inflation that has run rampant since before the turn of the new year.
Prices rose 5.5% in January with figures from the Office for National Statistics on February due next week with the Chancellor’s spring statement.
It was the third rate hike since December, but investors should not bet the farm that these will continue for the entire year.
Indeed, the Monetary Policy Committee has already started to slow down its hawkish attitude. At the previous meeting four members thought a 0.5 percentage point raise was more appropriate than a 0.25 percentage point raise, but this time around no one thought that.
“Stop trying to make 50 basis points rate rises happen,” as Regina George from Mean Girls might say.
In the latest meeting, there were no such calls, with one lone voice suggesting the Bank even held rates.
Turning to the US and the Federal Reserve decided it was about time it took action, raising rates by 25 basis points as it too tried to stymy inflation.
However, while there were tones of hawkish rhetoric, not everyone was convinced. The market is pricing in six more hikes before the end of the year, one at every meeting.
Several commentators disagree including Charles Hepworth, investment director at GAM Investments, who said it was “highly unlikely” while Federated Hermes senior economist Silvia Dall'Angelo said it “is not a given”.
The tricky thing for investors to know is what it all means. On the one hand, it is fairly concrete that rates are rising and they will continue to do so over the coming year.
In this scenario banks should do well, while high-growth tech names will struggle. Similarly, companies with little debt, or low-cost fixed debt, will survive better than highly leveraged firms.
Gold should fall off, as interest rates increase the opportunity cost – i.e. if you can get more from a bank account or bond, so why punt on the price of gold rising when you can get a guaranteed return?
The problem is knowing how much is already priced in. If the market already anticipates these rate rises (and is right), then the price of these assets should have already been affected.
Here it would require a lot of work for a DIY investor to pick the right stocks, although a good active manager should be competent enough to do it if you do not have the time or inclination to back individual companies.
On the other hand, what if markets are wrong? Then the opposite is true. If inflation slows, or the Bank of England and Federal Reserve decide they cannot continue to raise rates – which as well as bringing down inflation also slows economic growth – then the reverse will be true.
Tech stocks and other growth names should rebound, banks and value stocks will drop again and investors that ploughed their money into one trade could be left looking foolish.
How you invest – and how much risk you are willing to take on being right – is an individual call. Whatever you choose we wish you the best of luck.