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US Fed interest rate hike positive for UK large caps

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The US Federal Reserve’s decision to increase interest rates should be a boon for investors in the UK’s largest companies and it could also be a signal that the Bank of England will follow suit next year.

As heavily predicted by markets the Fed last night hiked interest rates by 25 basis points to the range of 0.5%-0.75%. It was the first increase since December 2015 and just the second rate rise since 2006.

AJ Bell’s investment director Russ Mould says the one quarter point rise shows that confidence in the US economy is building and that this is likely to ripple through the global economy.

“Rising US interest rates are likely to underpin the strong dollar which will continue to boost dollar earning UK-listed stocks such as miners and oil and gas companies,” says Mould. “This would lend support to the overall UK market given their prominent positions in the FTSE 100.”

The key, says Mould, is whether the Fed does a better job of following through with more rate increases next year, after failing to do so this year.

He says: “December’s increase represents just one rate hike for 2016, as against the four targeted 12 months ago, so it is interesting to see the Fed’s ‘dot plot’ suggests that rates will reach 1.25% to 1.5% by the end of 2017 – a further three rate rises, one more than was outlined after its November meeting.”

Mould says such an upward trajectory will raise concerns among some that the US economy remains “brittle”, while others could argue that the central bank risks falling behind the curve given President-elect Trump’s reflationary tax cut and spending plans.

For Fidelity’s investment director for personal investing Tom Stevenson, while there is no official connection between US and UK interest rates, he says many now believe the Bank of England will be the next central bank to increase rates.

“However, while inflation has risen more sharply than expected in the UK, I don’t expect UK interest rates to be raised in 2017,” he says. “It is likely that the Bank of England will keep rates at 0.25% to support growth as Brexit negotiations get under way.”

See’s Carney may be forced to raise interest rates in 2017, says top UK fund manager.

In such an environment Stevenson says UK investors should find more solace in investing in shares than holding cash.