FTSE 100 falls as BoE hikes rates, sees inflation falling slower than forecast

Proactive Investors –

FTSE 100 slips into the red as Bank of England lifts rates
Bank fails to rule further hikes, inflation to fall slower than predicted
Rolls-Royce (LON:RR) falls, no news on New Markets disappoints
Subdued start seen across the pond, PPI figures to come

US stocks are expected to open mixed but still enjoying the lift from softer-than-expected inflation data yesterday which helped fuel expectations of an interest rate reduction in the world’s biggest economy or at the least a halt to the current rate hiking cycle.

Futures for the Dow Jones Industrial Average fell 0.3% in pre-market trading, while those for the broader S&P 500 index lost 0.1% and contracts for the Nasdaq-100 were unchanged.

The tech-heavy Nasdaq closed up 1.04% on Wednesday while the S&P 500 rose 0.45% and the Dow Jones Industrial Average slipped 0.09%.

“Yesterday’s inflation data was particularly welcome as it supported the narrative of a pause in the Fed’s rate hiking cycle at the next meeting,” Michael Hewson, chief market analyst at CMC Markets UK.

“Today’s April PPI numbers could well reinforce that narrative further, if they continue to slow at the pace we’ve seen in the past few months.

Since the end of last year PPI has fallen from 6.2% in December to 2.7% in March and is expected to slow further to 2.5% today,” he added.

The PPI data is due out at 8.30 am ET.

In the background, however, concerns about the US debt ceiling continue to rumble on with no solution at hand so far.

President Joe Biden is due to meet with house speaker Ken McCarthy on Friday. Investors are holding on to hope of a last-minute solution.

FTSE 100 slips and pound advances after rate rise

The FTSE 100 slipped back following the Bank of England’s interest rate decision as the UK central bank suggested it was not done with its monetary tightening.

The lead index is now down 30 points to 7,711.32.

But the pound rallied from its lows, now trading down 0.1% against the US dollar, after being down 0.4% ahead of the announcement.

Reaction to the announcement is coming in thick and fast.

Samuel Tombs at Pantheon Macroeconomics: “The MPC refrained from signalling clearly that today’s interest rate increase will be the last one this year, but the language in the minutes continues to suggest that it will hike again only if evidence emerges of more persistent inflationary pressures than anticipated in its forecasts.”

“Our view remains that the MPC will keep Bank Rate at 4.50% for the remainder of this year, before cutting it by 25bp per quarter over the course of 2024, when it will be clear that the inflation genie has been pushed back into the bottle.”

Susannah Streeter, head of money and markets, Hargreaves Lansdown (LON:HRGV): “The rate raising marathon has passed yet another milestone as policymakers try and pull back runaway inflation.”

“The hike of 0.25% pushing the base rate to 4.5% was widely forecast, given that super-hot consumer prices are failing to cool off quickly despite rapid tightening. With wages staying elevated and consumer resilience strong, the finishing line of rate hikes may still be way off.”

Oliver Faizallah, head of fixed income research at Charles Stanley (LSE:CAY) said: “Going forward, the Bank of England have a very difficult job, navigating high inflation with a fragile economy. ”

“The Bank is likely to remain data dependent as they decide whether to pause or keep hiking. Policy makers and market participants will be looking closely for signs that show that the UK economy is finally giving in to the pressure of all the hikes to date, which would give them confidence that inflation will fall back to target sooner rather than later.”

Rachel Winter, Partner at Killik & Co, said: “Sticky inflation means the Bank of England has once again turned to its weapon of choice in hope of stamping out the inflationary pressures the economy is facing.”

“Another interest rate increase will be particularly unpopular with those on variable rate mortgages who’ve faced month after month of increased costs alongside higher bills and day to day costs.”

Joseph Calnan, Corporate FX Dealing Manager at Moneycorp, commented: “Today’s 0.25 rate hike is being billed by many as the last in what’s been a relentless cycle.”

“But if indicators thus far are anything to go by, it’s difficult to justify an end to hikes in the current context, despite the implications for consumers and businesses.”

“In time, once the growth outlook is more upbeat and the medium-term inflation path shallower, the Bank of England can perhaps afford to switch to more infrequent rate hikes. But for now, with CPI stubbornly staying over 10%, further corrective action will be crucial – whether that’s through more rate rises or quantitative tightening.”

Jeremy Batstone-Carr, European Strategist at Raymond James (NYSE:RJF) Investment Services said: ““We may therefore not yet be at the end of the rate hiking cycle. The MPC may be encouraged not to stop at 4.5%, but to carry on raising the base rate to 4.75% or even 5.00%, creating higher mortgage payments for UK homeowners.”

Unite general secretary Sharon Graham said: “Every time interest rates rise the banks make bonanza profits – now in the billions. Meanwhile businesses, mortgage holders, and renters pay the price. This medicine is killing the patient.

“The Bank of England again are behind the curve. Whether it be asking the country to take a national pay cut or blindly increasing interest rates, the Bank of England is not living in the real world.”