As expected, the UK’s Monetary Policy Committee (MPC) decided to hold the central bank base rate at 0.1% and leave the asset purchase facility at £895 billion. What does this mean for investors?
When the Monetary Policy Committee meets, market participants take note. I’ve taken note, so let’s look at what the MPC is and what its latest interest rate decision means for investors.
When and Why Does the Monetary Policy Committee (MPC) Meet?
The Bank of England’s Monetary Policy Committee (MPC) meets eight times a year for three and a half days, primarily to decide on the level of the UK’s interest rate known as the bank base rate— on which other banks’ interest rates depend. The most recent meeting was on Thursday, 23 September 2021.
What Does the Interest Rate Mean for Investors?
Interest rates are the main tool used to combat inflation, which the Bank of England is charged with keeping in check at 2%. In normal times, when inflation looks to be getting out of hand, interest rates are raised.
However, we’re not living in normal times thanks to the huge amounts of “quantitative easing” money that has been ploughed into the markets by central banks since the 2008 financial crisis. The US Federal Reserve, the European Central Bank (ECB), and the Bank of England all need to pare back their bond-buying programs at some point, which they may do before aggressively increasing interest rates to combat rising inflation.
Deploying one or both inflationary countermeasures (higher interest rates and lower bond-buying) can spook the markets and send stock prices down, with the possible exception of banking stocks.
Did this happen today? No. The interest rate was kept at 0.1%, the gilt-buying programme was left alone at £875bn, and corporate bond buying still stands at £20bn. But these things have to change eventually.
How Can You Benefit From Interest Rates?
There are many ways to benefit from interest rates. Some brokers provide “interest rates” markets for speculators to bet directly on the rise or fall of the rate. Most brokers let you trade foreign exchange (forex) currency pairs that may fluctuate as one currency becomes more valuable relative to another one when interest rates rise. Almost all brokers let you invest in banking stocks that could benefit from interest rate rises.
Make sure you’re ready for when the interest rate inevitably rises by signing up with one of these brokers:
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