What will be the consequence of quantitative tightening?

The environment of low interest rates and low inflation created by QE is particularly favoured the technology and consumer staple stocks, often grouped together as “growth shares.” 

A reversal of the QE activity may serve to reverse the outperformance of growth shares over the past decade.

Ed Smith, co-chief investment officer at Rathbones, says he believes the market can absorb the QT at present, but is concerned the central bank may be acting too quickly, as the current very high inflation rate in the UK economy may be transitory. 

He says: "Long-term inflation expectations have stopped rising, wage growth has fallen back to more normal levels, the latest KPMG REC [jobs] report shows moderating signs of labour supply shortages, the latest manufacturing survey shows falling input prices pressures, the normalisation of consumer spending from goods to services is resuming, and there are signs of supply chain unclogging all around the world.

"The UK will also experience an unprecedented fiscal tightening this year. With this in mind, we think the risks around current interest rate expectations are skewed to fewer rather than more rate hikes than the market is currently pricing for.

"But we will need to wait until the third quarter before we observe the pace at which inflation is likely to fall back, by which point bank rate is already likely to have hit 1 per cent given what has been set out today. The central bank has raised rates [to 0.5 per cent], which is hawkish. It also reduced the corporate bond buying programme from £20bn to £0. This has caught some of market by surprise, although it’s not likely to complete this until 2023.

"So, while it shocked credit markets, when the dust settles, the amount they will sell to the market is about the same as a couple of new issues a month, which the market will absorb.” 

 David Thorpe is special projects editor at FTAdviser