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We look ahead to the important Bank of England meeting on Thursday. In the meeting, we expect the MPC to raise interest rates by 0.25%, but to offer more cautious guidance for the rest of the year. As a result, we think that the outcome is neutral for the FTSE 100, but likely negative for GBP.

A hike, but how much?

The main thing to watch out for is if the BoE do hike, and if so by how much. Usually the MPC moves in 0.25% increments, seen already over the past few months. There is the potential for the bank to raise by 0.5%, and also a slim chance for the bank to do nothing and sit on their hands. We think the probability of no hike is 20%, a 25bps hike 60% and a 50bps hike 20%.

If we do see a 25bps rise, we think that the FTSE 100 will move slightly lower, but the move has been well signposted by the bank, so we don’t think it will cause too much of a reaction. In the same way, the impact on GBP should be minor too.

Either side is where the movements could be. If the bank think that inflation is really getting out of hand, a 50bps hike could be seen. This would see GBP jump higher, as investors get paid more for holding the currency. It would also be negative for most stocks, as funding costs of issuing new debt would increase. 

The MPC might choose not to hike at all, citing risks in Eastern Europe and higher commodity prices as a reason. The higher cost of living being felt due to higher energy prices are already coming through to everyday consumers. However, we struggle to see this being enough of a reason to put the BoE off raising rates at all.

Reaction and future guidance

For those that think a 50bps hike is coming, then getting long GBP crosses could be worthwhile. We like long GBPCHF and GBPUSD. As for stocks, we would look to buy banks that could benefit from this rise, such as Lloyds Banking Group and HSBC.

One final point to note is what comes after the rate decision. The future guidance on rate hikes for the rest of the year is key. Will the bank see inflation falling lower quickly? Does the higher energy prices mean the bank will be more cautious going forward? Is the uncertainty around Ukraine a factor that will go into future decision making? All of these questions could impact how the market prices the rest of the year.

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