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Investors flee equities

Shares sink as Bank pursues ‘faster’ rate hikes

Mark Carney

Mark Carney: needs to keep a grip on inflation

Asian stocks followed Wall St and London lower as the global market rout was officially declared a correction.

Japan’s Nikkei 225 index was down 3.2% by early afternoon trading, while China’s Shanghai Composite tumbled 5%. There were also sharp falls in South Korea and Australia.

London shares fell sharply again as the Bank of England indicated that interest rates would rise at a faster rate than earlier predictions.

The Monetary Policy Committee’s nine members voted unanimously to hold the Bank Rate at 0.5%, but investors were spooked by comments from Governor Mark Carney that the Bank sees a growing need to move faster on raising rates to keep a grip on inflation.

The FTSE 100 closed 1.49% or 108.73 points lower at 7,170.69.

Mr Carney’s views followed those of other central banks which are moving toward tighter monetary policy, a decade on from the financial crisis.

The BoE wants to return inflation to its 2% target which would mean keeping price growth in check within two years rather than three.

Sterling rose by more than a cent against the US dollar while British government bond prices fell.

The Bank raised its economic growth forecast for the UK to an average of 1.75% over the next three years.

After seeing a rebound on Wednesday, markets saw a resumption of selling. On Wall Street the Dow Jones closed down 4.15% or 1,033.23 points, the S&P 500 fell 100.58 points or 3.75% and Nasdaq was down 3.9% or 274.82 points.

Andrew Sentance, a former member of the MPC, and now senior economic adviser at PwC, said: “It is no surprise to see interest rates being kept on hold this month. But it is still likely that we will see at least one quarter-point rise in 2018 and possibly two or three.”

Nick Dixon, Investment Director at Aegon, said: “This week’s stock market turmoil originated from speculation that interest rates will rise quicker and steeper than expected, with follow through impacts into equity values and markets outside the US.

“Since the June 2016 Brexit vote, we have held a firm view that sterling weakness and inflationary pressure would force a faster pace of rate increases than the market had priced in. This week’s volatility is a timely reset of market expectations.

“Today’s decision to keep rates at 0.5% is temporary in our view. Fundamentals in the UK, along with pressure from the US, point towards a tightening rate cycle in the UK which will gather pace in the second half of 2018.”

Calum Bennie, savings expert at Scottish Friendly, commented: “The volatility in global stock markets may be front page news right now, but for the average investor there is little reason to be concerned. If anything normal service is resuming after years of artificial economic stimulus.

“Investors in stocks and shares ISAs should stay invested and weather the storm. Stock markets, particularly in the US, have been overheating for some time and investors should take heart from this correction as it has let off some much-needed steam.

“The decision today may have been to hold interest rates at 0.5%, but if markets are reacting to the likelihood of higher inflation and therefore higher interest rates then it is hard-pressed cash savers that will be set to benefit.”

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