Dominating the headlines is the increase in rates to 0.50%. I think the rise is more symbolic that economically significant. Yes it’s the first move North for a decade but let’s keep this in perspective. In the 80s and 90s rates ranged from 17% to about 5%. (Yesterday was also a great example of spin and how the sub-editors shape our perceptions. “Interest rates double!” shrieked one. Hhhm. Another perspective could be that all-time low rates go up by stuff-all and remain at stuff-all.)
“Interest Rates for Dummies”
Let’s set the scene. Think of the Bank of England like a bunch of scientists who have various drugs including caffeine at their disposal to make us behave in certain ways. If the economy is sluggish, confidence is low and we’re not spending ‘owt, then lowering rates is like giving the economy a triple shot, encouraging spending and investment. If the economy is starting to look a bit hyper (and don’t forget the rise in the cost of living is currently a slightly uncomfortable 3%) then an increase in interest rates is like putting it on chamomile tea and calming things down.
If life were a neat little textbook, in theory sterling should have gone up yesterday. And the FTSE 100 should have fallen. Why? When interest rates go up here, we become a more compelling savings destination for foreign investors. So money tends to flow in and this boosts demand for pounds. Which makes sterling stronger. This in turn impacts our shares because the FTSE 100 companies tend to make the majority of their revenues and profits in foreign markets. For example, Burberry makes much more from Asia than from the UK. BP operates in 72 countries. So a stronger pound means that their profits look punier when brought back to the UK and translated into pounds. Which is basically why we’d expect to see a higher interest rate have a depressing effect on the UK stock market.
But hang on….2016 and 2017 haven’t read the rulebook!
Once again we saw our woeful ability to predict what the hell is going to happen. Weirdly, we saw the pound slump and, correspondingly, the FTSE100 soar. Huh!? More important than the rise itself were the indicators about what lies ahead. We’ve been told to expect two more rate rises over the next three years. Markets actually were hoping for more and so they felt cheesed-off, disappointed and thought that the future for sterling wasn’t as exciting as it could have been. So they basically sulked and took it out on the pound. Lower pound, higher footsie.
What does this mean for me?
Finally, my terrifying moment of the week came when I was heading to Sky News last night to talk about all of this and they told me that the other guest was Ken Clarke. Only the former blooming Chancellor of the Exchequer! AAAAGH. Step aside, Kenny Boy and listen to the expert!?!? One of those daunting moments where you feel very small!
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