The Bank of England is set to hike the interest rate again tomorrow. So should you buy UK stocks despite the aggressive tightening cycle?
One day after the Federal Reserve announces its monetary policy, the Bank of England is expected to deliver another rate hike. This would be the third rate hike from the pandemic lows, as inflation keeps climbing in the UK.
The Official Bank Rate in the UK sits at 0.5% currently, and a further 0.25bp increase is in the cards. However, one should remember that a few Monetary Policy Committee members wanted to increase the rate by 50bp at their last meeting, so the bias is definitely hawkish.
Markets already know that. The Sonia swaps already price an aggressive hiking cycle. Like the Fed in the United States, the Bank of England was careful enough to communicate its intentions well ahead of lifting the rate, so the impact on the stock market was minimal.
FTSE 100 unphased by the prospects of further rate hikes
At the time of writing this article, the FTSE 100 index, the most representative of UK stocks, is up over 1%. Moreover, it bounced more than 450 points from its recent lows, despite investors being well aware of the Bank of England’s intentions.
The truth is that investors have had plenty to worry about lately. The pandemic and the war in Ukraine triggered sharp selloffs, but somehow the stock market remains bid.
With tomorrow’s 25bp rate hike, the Official Bank Rate reaches 0.75% – much higher than in the United States or in continental Europe. Yet, stocks are bid and mostly follow what the US stocks do.
All in all, geopolitical tensions do not stop the Bank of England from tightening. However, once the rate reaches 1%, the Bank of England may reconsider its intentions and wait to see the effect of the rate hikes on the real economy.
As such, any hint tomorrow that a pause comes may boost UK stocks further. Also, what the Fed says today at the press conference is equally important. If stocks in the US rally on the Fed hiking rates, why not UK stocks do the same?