How rising interest rates will affect the stock market
The Bank of England’s monetary policy committee is due to meet on Thursday March 17 to decide whether or not to raise interest rates. At its last meeting on February 3, the central bank doubled interest rates to 0.5% from 0.25%.
According to data from the Office for National Statistics (ONS), a measure of inflation, the consumer price index (CPI) fell from 5.4% in December to 5.5% in January, marking an acceleration for four consecutive months.
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Inflation in the UK has reached its highest rate since March 1992, adding pressure to the current cost of living with soaring gas and electricity prices, high weekly shopping expenses and a additional pressure on stagnant wages. The situation was difficult before the start of the Russian-Ukrainian war. Now, with the invasion, inflation is set to climb higher than expected and stay at unexpected levels for longer than experts and industries thought.
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Inflation is not always bad for an economy, but extremely high inflation can devalue the currency, increase the cost of living and economic uncertainty, and can even lead to hyperinflation if left untreated. too long.
Usually, to cope with rising inflation, central banks raise interest rates, which means that high interest rates slow down rising inflation because they reduce purchasing power and lower interest rates increase the rate of inflation because they encourage purchasing power. However, central banks cannot massively raise interest rates all at once, as this could lead to economic collapse. Instead, in times of high inflation, central banks raise interest rates in small increments.
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How can rising interest rates impact the stock market?
When the Bank of England decides to raise the interest rate, it increases the cost of borrowing on loans, mortgages and credit cards for individuals and businesses, which slows down cash flow in the ‘economy. This means that if a company wants to take out a loan or debt, it has to pay a higher interest rate, which makes that company’s stock riskier to invest in.
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Raising the interest rate also reduces the demand for loans in an economy and can reduce available consumer spending. Customers have to pay more on their outstanding bills, which will leave them with less disposable income.
This can again hamper growth and spending in the economy, which is negative for businesses as they may have to raise prices. So this will hit customers again as many won’t or can’t pay. This could slow the sale, reduce corporate profits and ultimately affect their stock price.
However, the impact of rising interest rates can be different across sectors, such as financial institutes that often do well when the central bank raises interest rates because it increases their profit potential.
A little inflation in an economy is considered healthy, but if inflation is rising sharply, it should be a matter of concern and should be addressed.
Investing in stock markets can be risky, especially when the situation is volatile due to a geopolitical crisis. Although many stocks can offer excellent returns to their investors, things could turn out differently. It is therefore very important to study and then invest.
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