FTSE 100: will the Bank of England hike its rates to 4.25%?

Has the recent banking crisis come to an end and will the BoE hike its rates further still?

This is the million-dollar question everyone is asking.

With three US banks failing and Switzerland’s second highest bank, Credit Suisse, being taken over by the country’s top bank UBS in order to avoid it going under - all within the last couple of weeks - investors are wondering whether rapidly rising interest rates have led to large losses in other banks and could thus provoke a run on other financial institutions.

The fear of contagion has led to a drop in the iShares Euro Stoxx 600 Banks ETF by over 20% from February’s high before it regained over 10% from Monday’s low as those worries abated ahead of Wednesday’s Federal Reserve (Fed) monetary policy meeting.

iShares Euro Stoxx 600 Banks UCITS

Will the Bank of England hike its rates for the eleventh time in a row on Thursday?

The governors of the Bank of England (BoE) will probably keep a keen eye on whether the US Federal Open Market Committee (FOMC) will decide on a rate hike or whether the US fed funds will be kept at 4.75% to 5.00% in order to reassure financial markets and avoid the risk of the banking crisis turning into a systemic one.

After all the disinflationary process continues to make headway in the US, reflecting the effect seven consecutive rate hikes have had on inflation and wage growth while also leading to increasing tech layoffs amid weaker earnings and corporate profits.

The Fed is acutely aware that there is a time lag between its monetary policy and the impact it has on the real economy as banks shift priorities towards ensuring they are maintaining a robust capital base and investor confidence, over new lending, thus tightening monetary policy further.

In the United Kingdom inflation looks to be far more sticky, though, with it having risen to 10.4% year-on-year in February versus 10.1% in January, its first rise in four months.

Food inflation rose to its highest level since 1977 due to shortages of salad produce and other vegetables as bad weather hit southern Europe and Africa amid persistently high electricity prices, while non-alcoholic beverages, restaurants and hotels as well as clothes also increased in price.

With this in mind, the Bank of England will likely follow the European Central Bank’s (ECB) lead in hiking rates despite the negative impact this may have on regional banks and investor confidence, probably not by the ECB’s 50-basis points but by 25-basis points to 4.25% in the UK. Several BoE committee members will probably argue that it is the only way to push inflation lower.

Technical outlook with regards to the BoE’s probable 25-basis point rate hike

The FTSE 100 continues to rise amid hopes that the banking crisis is on the wane, despite UK inflation unexpectedly rising to 10.4% in February versus a forecast 9.9%.

The FTSE 100’s rise above Tuesday’s high at 7,567 ahead of the FOMC meeting put the 14 March high at 7,643 on the map, above which sits strong resistance at 7,707 to 7,724, made up of the mid-January and early February lows. If overcome, the recent sharp sell-off was probably only a correction within a longer-term uptrend with new highs for the year becoming a possibility.

FTSE 100

Support can be seen along the 200-day simple moving average (SMA) at 7,423 and at the 7,410 early January low and while these levels underpin, further upside is expected to be seen since this week’s low at 7,203 has been made close to the 61.8% Fibonacci retracement of the October-to-March advance and has been accompanied by positive divergence on the daily Relative Strength Index (RSI).

Only failure below the 7,203 low seen on Monday, on a daily chart closing basis, would change our view to a medium-term bearish one with the October trough at 6,705 and below being in focus in such a scenario.