The FTSE fell in trading today after a less-than-cheery economic update from the Bank of England.
The FTSE 100 fell 2.99 per cent in trading today, after the central bank’s monetary policy committee raised the base rate of interest by 0.25 percentage points, to 1.25 per cent.
This is despite rate setters in the US hiking rates by 0.75 percentage points, and warning that faster, quicker rate hikes might be necessary amid spiralling inflation.
Three MPC members voted against the rise, instead requesting a 0.5 percentage point increase.
The committee said it now expects inflation be maintained at 9 per cent over the next few months, rising to “slightly above” 11 per cent in October.
It added that, if it deems it necessary, it will “act forcefully” in response to indications of more permanent inflationary pressures.
Laith Khalaf, head of investment analysis, AJ Bell said the BoE is playing a game of “slowly, slowly catchy inflation” rather than the more incendiary tactics in the US.
“Markets will no doubt seize on this as a sign the Bank of England has bottled it, but an incremental strategy allows the rate setting committee to observe more data as it comes in, and fine tune its approach as circumstances dictate.
“The US economy also has more long-term fixed mortgages than the UK, which makes interest rates across the pond a blunter policy tool, so the Fed has to create a bit of extra bang to have the same effect on a buck.”
Investment director for personal investing at Fidelity International, Maike Currie, said central bankers are “teetering along a tightrope”.
“The biggest concern [is] that raising rates too quickly could tip economies into recession.
“Monetary policy tightening is a very blunt tool to manage a very precarious situation.
“The challenge right now is whether a rise in rates will affect the prices that are really squeezing consumers, as these are being driven by global forces beyond the control of domestic central banks.”
Portfolio manager at Quilter Investors, Hinesh Patel said members of the MPC will be reeling from the political and populous backlash coming from record-setting levels of inflation.
“Andrew Bailey has been on record saying “it wasn’t me” but he is the governor – and must acknowledge they have sponsored government profligacy.”