A pause for breath in the FTSE 100’s recovery rally became a more pronounced sell off heading into a Bank of England meeting which saw interest rates kept on hold for now but also sent a signal that rates could increase sooner and more quickly than expected.

This helped the pound rally above $1.40 and put UK stocks under some pressure as observers speculated a rate hike from the current 0.5% will come as soon as May.

Higher sterling tends to be taken as a negative for large caps as it impacts the relative value of their foreign earnings. Around 70% of FTSE 100 earnings come from overseas.

In more general terms higher interest rates tend to be negative for equities as an asset class. The prospect of faster-than-expected rate increases in the US was a significant factor behind the market correction seen at the beginning of this week.

Governor Mark Carney says inflation could spike above 3% in the short term but also adopted slightly softer language on rates in his press conference following the decision.

He stressed that the bank is not planning to go back to the 5%-plus levels seen before the financial crisis and not at the pace seen in previous interest rate cycles.

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Issue Date: 08 Feb 2018