What's going on?
On Thursday, the Bank of England (BoE) announced it’s raising UK interest rates – leading British stocks to fall by 1%.
What does this mean?
At 0.75%, this is the highest interest rate the UK’s seen since 2009. Investors were primed for a rate hike in May but the BoE held firm saying that economic growth wasn’t quite where it needed to be. Now, it thinks the country’s economic machine’s going at almost full pelt, which could push inflation higher – and the rate increase should help keep it in check (by making saving more attractive than spending, demand for products shouldn’t rise as quickly and neither should prices).
Why should I care?
The bigger picture: There’s a party on a mountain – and almost everyone’s hiking.
The UK last raised interest rates in November 2017. Since then, the US Federal Reserve’s been on a tear – it’s hiked three times, with an eye on doing it twice more before the year’s out (the next hike’s expected in September). In Europe, interest rate increases are probably on the table in October 2019. But in Japan, they’re likely a way off – on Tuesday, the country’s central bank ended speculation that it’d make big changes to tackle stubbornly low inflation.
For markets: A stronger pound helped force UK stocks lower.
Higher interest rates generally lead to a higher return on savings in UK bank accounts. As investors buy pounds in order to take advantage, the value of the pound relative to other currencies (like the US dollar) rises. When currencies fall in value, things for sale in that currency (like companies’ shares or products) look cheaper to foreign buyers. Since the opposite’s happened in this instance, investors likely sold off UK stocks that may see less international demand for their now-more-pricey products.