The Bank of England kept interest rates unchanged at 0.1% today. This was to be expected considering that it had earlier said that high current inflation is transitory. Also, growth has been relatively weak in the recent months. However, it does warn that inflation could be higher in the next few months. This could lead to higher interest rates as well.
What this essentially says to me is that we will likely soon be in a cycle of rising interest rates. This is a common phenomenon during times when growth picks up. The question I now seek to answer is, what will this mean for my FTSE 100 investments?
Buy: FTSE 100 banks
I think banking stocks may benefit from this trend. A typical retail bank earns revenues from the interest rates it charges for loans. If growth picks up, it is likely that loan demand will rise too. And if policy interest rates also rise, that could encourage banks to increase them too. Of course, how much they benefit depends on the exact conditions at the time.
For instance, if interest rates rise too much, demand for loans can fall and banks may not end up benefiting. Also, along with interest rates on loans, deposit rates will probably rise too. So, the higher interest rate environment may or may not be beneficial to banks’ margins. Also, if inflation gets too far out of control, then growth can slump again. And that is not good for any company, not just banks.
But all things considered, I think there is a chance that banks are more likely to benefit than not. In fact, I am so bullish on banks that I think their share prices could see explosive growth in 2022. Banking stocks are a buy for me.
Avoid: travel stocks
Heavily indebted stocks could be negatively impacted by higher interest rates. A number of companies have seen a rise in debt levels in the past year to manage the pandemic. But I am most concerned about FTSE 100 travel stocks, which includes the likes of International Consolidated Airlines Group and Rolls-Royce. Except travel, all other sectors of the economy are now pretty much back to business as usual. This means that travel could be harder hit by higher interest rates than others, who can hope to return to pre-pandemic revenues now, if they have not already. This makes these stocks risky for me to buy now. I would avoid them.
Avoid: property stocks
I also think that there is a possibility that property stocks could be indirectly impacted. FTSE 100 property stocks saw an unexpected rally last year as supportive government policies led to a spurt in house purchases. However, these policies are now being rolled back. And if interest rates rise too, that can be a double whammy for house builders. A substantial proportion of houses are bought on mortgage, and people may be tempted to delay the buying decision if interest rates rise too much. So I would think carefully before buying property stocks.
