The first UK interest rate rise in a decade has weighed on shares in housebuilders and surprisingly hasn’t triggered a rally in banks, as one might have expected.
The Bank of England has lifted the official base rate from 0.25% to 0.5% in response to inflation running ahead of target. The Bank’s Monetary Policy Committee (MPC) voted by a majority of 7-2 to raise rates.
Higher borrowing costs are bad for anyone on a tracker mortgage or individuals hoping to get on the property ladder. That’s why shares in housebuilders are down on the news.
Persimmon falls 1.6% to £28.12
Taylor Wimpey slips 1.2% to 199.2p
Berkeley slips 0.4% to £37.04
Conversely, higher interest rates are good for the financial sector as constituents tend to enjoy fatter profit margins which serve to lift earnings and ultimately share prices.
However, shares in the big London-listed banks fail to spark up on the news as it is clear the MPC is taking a very cautious approach.
The Bank of England says it only expects interest rates to rise gradually and by a limited amount.
Only shares in Barclays (BARC) and HSBC (HBSA) trade in positive territory.
Barclays rises 0.5% to 185.1p
HSBC increases 0.3% to 734.7p
Lloyds drops 1% to 67.9p
Royal Bank of Scotland falls 1.1% to 281.4p
The Bank of England last raised interest rates in July 2007. Interest rates subsequently fell to historic lows to help the UK economy recover from the global financial crisis.
Sterling fell by one cent against the dollar to $1.31 on today’s news. That triggered a new lift in the FTSE 100 which now trades up 45 points to 7,533.
‘Gilts and sterling had anticipated the move and had been taking profits this morning,’ says Michel Perera, chief investment officer at Canaccord Genuity Wealth Management.
‘The immediate reaction was a further drop in sterling, triggering a rally in equities and a strong lift for gilts.
‘The statement was dovish, forecasting inflation in one year at 2.37% and with two more hikes for the next three years.
‘The Bank of England had boxed itself into this hike and wanted to deliver a dovish statement to offset that, in order to give itself some leeway in light of the Brexit negotiations ahead. It is unlikely that sterling or gilt yields will harden much further from here.’
