Gimme Shelter

Image source: Michael Rosebrock - Shutterstock

What's going on?

The Bank of England (BoE) upped its forecast for the UK’s economic growth on Thursday, but the fallout could cause itchy feet and feverish sweats among investors.

What does this mean?

The UK’s central bank is now expecting the country’s economy to grow by over 7% in 2021, up from its 5% forecast back in February (tweet this). That’s mostly down to the surprise success of its vaccine rollout, which has seen over half the population get at least their first shot.

But with every silver lining comes a cloud, and the BoE’s decided to slow down its bond-buying program – one that helped businesses and individuals during the pandemic by lowering the cost of borrowing money. And now the BoE’s bitten the bullet, it might only be a matter of time before other major central banks follow suit.

Why should I care?

For markets: You know what that means…

The prospect of higher interest rates could make investors nervous. See, when the BoE reduces its bond purchases, the total demand for them (all else equal) is lower. That drop in demand should send their prices down and their yields – which move inversely – up. And since investors use these yields to help decide interest rates on new bonds, there’s a risk those rates will rise too. That’ll make borrowing more expensive, leading companies to invest less and grow their earnings more slowly – in turn damaging their share prices.

The bigger picture: Investors are easily spooked.

Earlier this week, Janet Yellen – the US Treasury Secretary and former Federal Reserve chair – said the country’s central bank might need to hike interest rates to stop the economy growing too fast, too quickly. That seemed to worry already-skittish investors, who sold off stocks – especially those of most-at-risk tech firms – in their droves. Of course, plenty of them bought back into them, tail between legs, when she pointed out that her statement was neither a prediction nor a recommendation.

Originally posted as part of the Finimize daily email.

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