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What might happen to the FTSE 100 when interest rates rise?

What could this all mean for the FTSE 100?

First off, it’s worth bearing in mind the age-old adage: time in the market beats timing the market. After the early 00’s dot-com bubble pop, 2008 credit crunch and 2020 pandemic mini-crash, the FTSE 100 has always recovered. Even if in the past, it’s taken years.

And rate rises aren’t guaranteed. Forex traders expected the Bank of England to increase the base rate to 0.25% this month. And it declined to do so, arguing that raising rates domestically could do too much damage to the jobs recovery while having little impact on the global supply chain squeeze. But on Monday, Governor Andrew Bailey said he was ‘very uneasy’ about the rising cost of living.

And on the assumption that rates do rise soon, the impact on the FTSE 100 is likely to be negative. Many companies on the index carry sizeable debt, which would cost more to service. Any new credit would become harder to acquire, and more expensive to pay back, constraining 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 right now, the FTSE 100 has gained 15% in the past year. It only needs to rise an additional 7% to reach its all-time high of 7,749 it struck on 31 July 2018. With the European Central Bank warning of ‘exuberance’ in global asset classes, some investors might consider an interest rate hike as the catalyst for a FTSE 100 dip.

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

A rate rise offers opportunities to forex traders as well. There’s plenty of 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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