Interest rates

FTSE 100: What Could Happen If Interest Rates Rise Soon?

What could all of this mean for the FTSE 100?

First of all, it is worth keeping in mind the old adage: time in the market beats the rhythm of the market. After the dot-com bubble of the early 2000s, the credit crunch of 2008, and the pandemic mini-crash of 2020, the FTSE 100 has always recovered. Although in the past it took years.

And rate hikes are not guaranteed. Forex traders expected the Bank of England to raise the base rate to 0.25% this month. And he refused to do so, arguing that a rate hike nationwide could hurt too much of the employment recovery while having little impact on squeezing the global supply chain. But on Monday, the governor Andrew Bailey said he was “very worried” about the rising cost of living.

And in the event of an imminent rise in rates, the impact on the FTSE 100 should be negative. Many companies in the index carry significant debt, which would cost more to service. Any new credit would become more difficult to acquire and more expensive to repay, limiting growth. And the last time rates rose, from 0.5% to 0.75% in August 2018, it lost 1,000 points in less than four months.

At 7,256 points currently, the FTSE 100 gained 15% last year. It only needs to increase an additional 7% to reach its all-time high of 7,749, it reached on July 31, 2018. With the Warning from the European Central Bank Of “exuberance” in global asset classes, some investors might see a rise in interest rates as the catalyst for a decline in the FTSE 100.

But if rates rise, some stocks will benefit more than others. Banks like Lloyds, the UK’s largest mortgage lender, will see their profits rise on credit repayments. Mining stocks like Barrick Gold or Glencore are also likely to see some upside as investors seek the relative safety of raw minerals. And energy companies like BP or Shell have also performed well historically.

A rise in rates also offers opportunities for forex traders. There are many opportunities for the savvy investor at IG. What do you think will happen next?

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* Based on revenue excluding FX (published financial statements, June 2020).

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