Home > Will UK Inflation Increase Send Interest Rates and Bank Shares Higher?

Will UK Inflation Increase Send Interest Rates and Bank Shares Higher?

At 3.2%, the UK's CPI inflation rate has seen its biggest rise since records began in 1997. If the Bank of England decides to raise historically low interest rates in response, stock prices could fall, except for bank shares.

This morning, Wednesday 15 September 2021, the UK’s Office for National Statistics announced that the consumer prices index measure of inflation had risen from 2% in July to 3.2% in August. To put this into perspective, it’s the biggest jump since records began in 1997, and it’s above the Bank of England’s inflation target.

Will the central bank be forced to raise interest rates as a result, and will this send stock prices lower but bank shares higher?

What Is Inflation?

Inflation is the rate at which the prices of products and services are rising, which means that the money you hold today will be worth less tomorrow (and next month, and next year). Consumer Price Index (CPI) inflation uses a standardised basket of consumer goods and services — such as transportation, food, and medical care — as the benchmark to see how far and fast prices are rising.

A rise in inflation above 2% means that the Bank of England has to write a letter to the UK government to say why the rate is above its target and what it intends to do about it. One thing it could do is raise interest rates, which could send most share prices lower but banking stocks higher. 

Should You Buy British Banking Stocks Now?

Rising interest rates are generally incompatible with rising stock prices. Higher interest rates are bad for businesses because they increase the costs of borrowing for business investment, and they’re bad for stock prices because potential investors will be more tempted to put their money into bank deposit accounts than make riskier investments in stocks.

Although it’s not guaranteed, banks could benefit from rising interest rates. Not only will they attract more deposits from savers, but also they can charge more interest on the loans they make to companies and individuals. The best time to buy British banking stocks such as Barclays (BARC), Lloyds Banking Group (LYG), and Natwest Group (NWG) could be when their share prices are historically low but interest rates could go high. Which is now.

Where Can You Buy British Bank Stocks Today?

The London Stock Exchange offers several well-known British banking stocks to choose from, or you can go farther afield if you think that the inflation increase (and possible interest rates increase) will go global. To buy bank shares, you’ll need a broker, and here are two of the best:

eToro

eToro is one of the world's leading multi-asset trading platforms offering some of the lowest commission and fee rates in the industry. It's social copy trading features make it a great choice for those getting started.

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Webull

Financial company driven by technology and offering all-in-one self-directed investment platform that provides excellent user experience.

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