UK stock market reacts to interest rate hike, risks remain

The FTSE 100 recovered to a certain extent after the Bank of England decided to raise interest rates according to expectations; Judging by the reaction, the market took the decision as dovish. However, the members of the bank’s committee did not vote unanimously, with a group aiming for a more aggressive stance.

The 50 basis point raise contrasts with the larger increase decided by the Federal Reserve at a time when both institutions fight elevated inflation. In this regard, both banks could continue tightening their monetary policy in their next meetings.

The banking sector in particular could be a big winner during this period as higher interest rates help improve margins. The sector could however be exposed to a slowdown in growth in other sectors as the third quarter could record slightly negative GDP growth.

In this regard, banks like HSBC, Lloyds and Barclays could maintain their trend toward higher prices despite the economic slowdown.

The energy sector could be under pressure due to the volatility in energy markets and the declining oil prices over the longer term as demand shrinks. Bank of England said that the energy price guarantee will lower inflation by 5 percentage points in 2023 but will add to a medium-term inflation pressure. However, companies like Shell and BP could find some support over the short term if tensions in Eastern Europe continue to push crude prices higher.

Further uncertainties could arise with the approach of the winter season, as the country and Europe look for energy sources for heating. The increased demand could push natural gas prices higher providing support for the energy sector but eroding margins for others.