In a move that surprised a fair few people, the Bank of England decided to raise interest rates today. The increase was from 0.1% to 0.25%. Although this isn’t a huge rise, it’s more about the fact that a hike actually happened. Given the outlook from the Omicron variant in recent weeks, I for one thought that the committee would decide to sit on their hands. However, with a rate hike now announced, what will the move mean for the FTSE 100?
A move lower for the FTSE 100
The initial reaction of the FTSE 100 was to fall. However, there are a couple of things worth noting. First, it only fell about 30 points, from 7,265 to 7,235. Second, the market was already up over 1% on the day before the decision came out. Therefore, the overall positive mood of the FTSE 100 today clearly wasn’t really derailed by the announcement.
The fall after the announcement was expected, given that higher interest rates are generally negative for most corporates. The reason for this is that higher rates make it more expensive to borrow money. Given that most FTSE 100 stocks have debt of some form, servicing and issuing new debt will cost more.
I think the muted reaction reflects the fact that the rate hike may be a negative, but is minor at this stage. A 0.15% increase shouldn’t be the end of the world for some stocks. However, with the potential for more hikes next year, I feel that as an investor, I need to think ahead and be careful in the shares that I might buy.
Winners and losers from a rate hike
Given that the meeting was the main event for the FTSE 100 today, I can look at the top gainers and losers to see the impact. For example, in the top five gainers today are Lloyds Banking Group, Barclays and Standard Chartered. These banks actually stand to gain from an interest rate hike. This is because it lifts the net interest margin, a key metric for profitability. The higher the base rate, the bigger the buffer that can be built in to the spread between the rate charged for lending versus that paid out for deposits.
Also, Hargreaves Lansdown shares are up almost 6% on the day. Part of this uplift could be down to the rate hike, in my opinion. Volatility in the market is good for the broker, as it’ll likely coincide with higher trading from customers buying and selling stocks.
In terms of losers, those with high debt-to-equity ratios have struggled to post gains. Yet there aren’t any large share price falls so far today from the announcement. As mentioned above, this is likely due to the fact that the hike was relatively small.
Key takeaways
The volatility in the FTSE 100 on Thursday shows that paying attention to macroeconomic events is very important. Based on the meeting today, I’m considering increasing my allocation to financial stocks, and will check the outstanding debt levels of other companies.
