The Bank of England has held off from raising interest rates and has left them at a historic low of 0.1 per cent even though it also gave its highest inflation forecast for a decade, predicting it would reach 5 per cent by spring next year.
However, the bank’s Monetary Policy Committee kept its stance on raising rates over the coming months. But the level of urgency was played down after Andrew Bailey saying in October that the committee will have to act to restrain inflation.
The surprise decision to keep interest rates the same was reflected in the financial markets, which were confident that the Bank of England would raise rates to 0.25 per cent for the first time since 2018.
Sterling fell 1.2 per cent against the US Dollar to $1.352 after the announcement, down from $1.364 before the announcement. While the FTSE 100 jumped 0.62 per cent from 7253.5 to 7298.2.
There was no surprise that the only real losers from the announcement were the banks.
Why were stocks up today except the banks?
Interest rates are key to the stock market as it gives investors a better insight on where to put their money. When interest rates are low, the rates received on fixed interest investments such as bonds are also low as they are linked. So, when this happens, investors move their money from fixed interest investments such as bonds and invest it into the stock market, due to the poor return they will have received on their fixed interest holdings. This influx of new investments drives the prices of stocks up as they are more appealing to hold.
However, some sectors in the stock market don’t benefit from lower rates. The sector that loses out the most is the financial sector. Banks, brokerages, mortgage companies and insurance companies lose out because when interest rates are higher, their earnings often increase because they can charge more for lending.
