Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

INTEREST rates will rise on both sides of the Atlantic this week. Markets have had plenty of time to get used to the idea of tighter monetary policy. But how will they react when the squeeze finally arrives?

Central banks: what to expect?

The main focus is on the Fed this week. Having kicked off the tightening cycle with a toe-in-the-water quarter point interest rate hike in March, the US central bank will get into its stride on Wednesday with an expected 0.5% rise to a 0.75-1.0% range. That could be the first of several bigger rate rises, as the Fed aims to get back to a neutral policy (not too hot, not too cold) of 2.5% by the end of the year. Markets expect US rates to end up at 3.5% before easing back as either inflation is brought to heel or (much worse for markets) growth goes into reverse.

Meanwhile, the Bank of England must decide whether to impose a fourth rate hike in four meetings on Thursday. That would take UK rates to 1%. On both sides of the pond, stagflation is the fear but here it’s the ‘stag’ rather than the ‘flation’ that’s worrying investors. Retail sales went into reverse last week and GDP ground to a halt in February. With Brexit leading to a shortage of workers, the risk of a wage price spiral is also rising.

How are investors responding?

Markets are reacting in predictable ways. The prospect of higher interest rates is feeding into higher bond yields, with the benchmark US 10-year Treasury bond yielding 3% this week for the first time since 2018. At that level, fixed income markets have already priced in most of the expected rise in rates so bond investors are asking whether this might be a good time to top up. A decent yield coupled with the near certainty that the US government will return your capital makes bonds look more interesting than they have in a long while.

Elsewhere, currencies are moving on the back of the widening gap between US interest rates and those in other countries. The dollar stands at a 20 year high versus a basket of rivals. The pound is languishing near recent lows at $1.25 while the euro and yen are at multi-year lows of $1.05 and 130 yen to the dollar respectively. The Chinese renminbi is also falling versus the US currency.

The shares most exposed to higher interest rates - growth stocks like those in the technology sector - are on the back foot. The MSCI Growth Shares index is now in bear market territory, down more than 20% from the November peak.

Reasons to be cheerful?

The good news is coming from the maturing first quarter earnings season. We’re about half-way through and 80% of the companies reporting are beating expectations. Growth is forecast to be nearly 9% for the first three months of the year.

Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. When interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.

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