Flaming June sees interest rates flare

June was a month for rising interest rates on both sides of the Atlantic.

Source Bank of England, Federal Reserve

June was a notable month for interest rates:

  • Firstly, the US central bank, the Federal Reserve (the Fed) increased its main interest rate by 0.75% to 1.50%–1.75%. It was the third consecutive meeting at which the Fed had raised rates and the bank made clear it would not be the last. The Fed’s rate setters published a set of projections that showed expectations for a 3.4% rate by the end of year.
  • A day later it was the turn of the UK central bank, the Bank of England, to increase its rate for the fifth consecutive meeting. The Bank was less aggressive than the Fed, taking its rate up by 0.25% to 1.25%. It was also more circumspect about future increases but suggested that further inflation was likely, potentially entailing further ‘actions’ from them.

The actions of both central banks were driven by the same factor – surging inflation. In May, US CPI inflation was 8.6%, while in the UK it was 9.1%, both four-decade highs. The Bank expects UK inflation to be ‘slightly over 11%’ by October, when the next adjustment to the utility price cap takes effect. Perhaps wisely, the Fed does not project CPI inflation.

Neither bank surprised the markets with their rate increase. Central bankers do their best to avoid spooking markets and are masters of telegraphing intentions. The forewarning did not mean investors were happy when confirmation arrived. The worry on both sides of the pond is that the upward march of interest rates will lead to a recession. This is neatly summarised in a view from one billionaire investor that rates will go on rising “until something breaks”.

For investors, these are uncomfortable times. Values are generally falling, albeit not in a straight line. Some sectors – such as energy – have been doing fine, while others – loss-making tech companies, for example – have dropped faster than the overall market. If you think you can catch any of the movements, just cast your mind back to March 2020, very early on in the pandemic. Both the US and UK stock markets hit their lows at that point: in March 2020 there were no vaccines available and COVID-19’s worst impact had yet to arrive. It is only easy to spot a perfect time to invest in retrospect.

The value of your investment and any income from it can go down as well as up and you may not get back the full amount you invested.

Past performance is not a reliable indicator of future performance.

Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.

Content correct at the time of writing and is intended for general information only and should not be construed as advice.

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