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A dangerous move

The Bank of England might raise Bank rate next week – this is a risky move
A dangerous move

Economists expect the Bank of England to raise Bank rate by a quarter-point to 0.75 per cent next Thursday. Historic statistics suggest this is no big deal. Bank economists have estimated that, in the past, a quarter point rise in rates reduces output by only around 0.15 per cent. That’s only a fraction of a forecast error.

So, why the fuss? One good reason is that this rate rise might do more harm to shares and the real economy than those historic estimates imply.

For equities, the danger is that it might trigger a reversal of the “reach for yield”. In recent years, low interest rates might have tempted investors into shares not because of confidence about dividend growth, but simply out of desperation for some kind of return. If this is the case, then rising rates might prompt them to switch back into cash when returns on it improve.

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