aerial view of city buildings

Today the Bank of England (BoE) meet in what is expected to see the central bank raise rates again by 25bps. This will take the base rate to the psychologically important 1% level, in what is the fastest rate of tightening monetary policy seen for several decades. Here’s what we’re going to be watching for.

A likely hike today

The rate hike itself is again mostly priced in, as has been the case for previous meetings over the past few months. Therefore, we don’t see a huge amount of movement in the FTSE 100, GBP and UK bond yields in the immediate aftermath if a 25bps hike is given.

Clearly, there’s always some uncertainty that no hike arises, so a small movement is still likely as a knee jerk reaction even with a interest rate increase. This should be negative for the stock market, offering strength for GBP and seeing yields move higher.

The other point worth watching on the hike is how unanimous the decision is between the committee. the nine person team should vote 8-1 in support of a hike. But if we see one or two more dissenters, then the hike could be taken in a bad light by the market. A 7-2 or even 6-3 decision would imply the committee have differing views, and that a hike might not be in the best interests.

Further guidance needed

Following on from this, we think the major thing to watch for with the Bank of England today is the view for the rest of the year and beyond. UK economic data has started to stall, along with inflation spiraling higher. Add into the mix the cost of living crisis with higher energy costs, and raising interest rates doesn’t appear to make a lot of sense.

There is a need for higher rates to stem inflation, but it’ll be key to see when the central bank expects inflation to return to the 2% target. If this is over the next year, then the pressure to further raise rates in 2022 could be eased. This would be positive for the stock market, but see GBP fall against peers.

We also want to see how concerned the central bank are with regards to economic activity, and if they are looking for a rise in unemployment and other variables. This will be more of an impact on the FTSE 100 in the short term.

Potential market reactions

If the BoE hike today but signal less hikes for 2022, we think that the FTSE 100 could be off to the races. This was seen yesterday when the US Fed raised rates by 50bps, but didn’t appear to want to be overly aggressive in hikes in coming months. The US indices rallied hard following the meeting.

In this case, we think GBP could really struggle. Especially when paired against the strong USD, GBPUSD could feel the pinch. At 1.2540, it isn’t far away from two year lows, with little support until the 1.2000 level.

As for bond yields, a repricing of expectations would be seen, with the short end of the curve moving higher but longer dated yields reducing with a bear flattening move.

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