If Footsie falls...

Article Abstract:

The United Kingdom Monetary Policy Committee (MPC) is concerned that if stock prices fall, a recession could follow. UK consumers may be especially sensitive to stock prices because of the high value of the stocks they own. The risk of a stock price fall was a factor influencing the MPC's decision not to increase interest rates in Feb 1998. Investors may not be unduly affected by a stock price drop because they may offset this against prior gains. Stock prices may drop for reasons such as supply shocks, which also affect consumption. It is not clear whether a link between stock price falls and recession should lead the MPC to risk higher inflation.

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Footsie's invisible defence

Article Abstract:

United Kingdom stock prices have risen to an extent that is not easy to explain, and bears are concerned that a profit squeeze could occur, which would affect stock prices. Profits account for an unusually high share of gross domestic product (GDP), so they may be under pressure. The equity risk premium is likely to be low, since growth has been steady and inflation low for some years. This means that future dividends are less likely to be discounted. High stock prices then to some extent reflect confidence in the Bank of England's skill in maintaining price stability.

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