The Bank of England’s monetary policy committee will meet on Thursday and it could take further action to try to curb inflation. Last month, the committee decided to increase interest rates, which caused the FTSE 100 to fall in response. The consensus for the meeting this week is for another interest rate hike of 0.25%. This would take the rate to 0.5%. Interestingly, it would be the first time that the central bank has raised rates consecutively since 2004. Here’s what I’m watching out for.
Hike or no hike
Firstly, I need to see if the consensus is correct. The crowd is not always right, something that was shown back in November. Many were expecting the central bank to increase the rate then, but the committee decided against it. The decision on Thursday is by no means a done deal, so I don’t want to presume that it’ll 100% happen.
The rate decision will immediately be felt in the stock market. I’d expect that an increase in rates would cause the FTSE 100 to fall, while no increase would see a rally. Historically this has been the case, as higher interest rates aren’t good news for the majority of companies. It increases the cost of issuing new debt. It also leaves an investor like me with a decision to make. If I can pick up higher interest leaving my funds in my bank account, should I risk investing it in the market?
As a note, there are some companies that do better with higher rates. This includes banking stocks such as Standard Chartered, as I explained in more detail here.
Thinking ahead for 2022
The second thing at the BoE meeting that I’m focused on is the commentary around future interest rates. Some analysts are forecasting as many as three hikes this year. This could put the base rate at 1% by the end of 2022.
The committee members could address what their thinking is for the rest of the year. This will likely be based on their expectations for inflation. If inflation levels are due to subside and move back towards the 2% target, then further increases in the base rate shouldn’t be needed.
I want to note this because it will also be a driver for the FTSE 100. If investors think that multiple increases are coming, they’ll likely take more action on their portfolios. This might mean them buying more defensive stocks such as utility companies like National Grid.
Meeting outlook
Finally, I want to understand what the outlook is from the central bank more generally, outside of interest rates. The committee should present thoughts on the state of the broader economy. This will include points on employment, GDP and even the projected impact of Covid-19.
Although this might not move the FTSE 100 immediately, it’ll help me to decide in which areas of the economy to consider buying stocks. For example, if the committee flags that it expects higher than expected growth fuelled by consumer spending, then I’d consider buying consumer discretionary stocks.
It’s clear to me that as an investor, although the interest rate decision will be key on Thursday, there are other points that I need to be aware of and listen to as well.
Jon Smith has no position in any share mentioned. The Motley Fool UK has recommended Standard Chartered. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
