Bank of England keeps the sugar rush of cheap money on tap

  • Bank of England keeps rates at historic low of 0.1%.
  • The bank expects inflation to rise above 3% temporarily.
  • The pound slips 0.3% against the dollar.
  • The FTSE 100 rises 0.5%.
  • Mining giants, energy and housing stocks gain.

Susannah Streeter, senior investment and markets analyst Hargreaves Lansdown

‘’The Bank of England isn’t ripping up the party rule book yet, content to let the economy feast on record-low rates and ultra-loose monetary policy. It is on alert, ready to change the game if the inflationary guest starts acting up, but right now it’s not changing the mood music.

The UK economy is still dancing to the tune of consumer confidence, helped by a bouncy castle of a housing market and the jump in activity since the re-opening of shops, pubs and restaurants in April hasn’t lost much energy. Current economic activity is even stronger than in May, with supply bottlenecks pushing up prices at a time of strong demand for goods.

So while the recovery party continues, CPI inflation is expected to blow the Bank’s target and exceed 3% temporarily, but then it’s expected to be in retreat, with the balloon of higher prices losing air.

Already there are party pooper signs. Companies are having to reduce services, due to the lack of staff. The Bank of England identifies that there are now recruitment difficulties across sectors and regions, and this could be a drag on growth.

The Bank of England knows that the sugar rush of cheap money needs to be withdrawn. But right now it’s judging that the guests at the party aren’t yet robust enough to cope with their treats being taken away.

This attitude, with interest rate rises not yet in sight, pushed down sterling by 0.3% against the dollar, helping to propel the FTSE 100 higher, which is stuffed full of international companies which benefit from the exchange rate. With a barrel of Brent crude still above $75, a level it’s not been at since April 2019, Shell was one of the top risers in the blue-chip index, lifting 1.5%

Higher energy prices are yet another sign the global recovery is picking up pace, and mining giants have also gained so far today with Anglo American up 2% and Glencore and Rio Tinto rising by 1.5%.

With consumer confidence still high and the housing market not losing much steam, Berkeley Homes and Rightmove were also among the big gainers today in the blue-chip index, rising by 2% and 1.8% respectively by lunchtime.’’

Kindly shared by Hargreaves Lansdown

Main photo courtesy of Pixabay