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.

STOCK markets will face another test this week as central bankers in both the UK and US sit down to decide what action to take in the face of spiralling living costs.

Both the US Federal Reserve and the Bank of England meet - on Wednesday and Thursday respectively - with rate rises on both sides of the Atlantic on the cards. For the Fed, it would be the first rise in rates since 2018, while the Bank of England has already made two increases in recent months and may move again - maybe by as much as a half-point.

The action has been prompted, of course, by rapidly rising prices. Central banks can raise borrowing costs in the financial system to make credit more expensive, thereby reducing demand and, the theory goes, upward pressure on prices.

In more normal economic times, that would be the silver lining for households of a rise in rates - yes it will cost more to borrow but it will help reduce your costs in the slightly longer term.

The problem right now is that no one really expects a rise in rates to affect the prices that are really squeezing consumers. Those are being driven by global forces beyond the control of domestic central banks.

Global energy prices for oil and gas were already on the rise before Russia’s invasion of Ukraine further threatened supply, and they have spiked again since then. The effects are being felt right now at petrol station forecourts, where petrol is at a record average £1.63 a litre, and in household energy bills, where families are being warned they’ll need to come up with an extra £1,000 or more to heat their home. Letters landing on doormats this month lay bare the increases that are on the way. If you haven’t had yours yet, you soon will do.

These are costs which are very difficult to avoid and are therefore unlikely to be reduced by taking demand out of the economy via higher rates. You still need to fill the car and heat the home, even if it means paying more.

Why, then, are markets betting so firmly on a rise in rates when the Fed and Bank of England announce their next move? The unappealing answer is that rate-setters see inflation coming not only from these global forces, but also from heightened consumer demand that they can do something about. With some economists now expecting UK inflation to breach 9% this year, rate-setters may act to reduce whatever inflationary pressure they can even if there is lots they can do nothing about.

Higher rates tend to be bad for stock markets, especially when so much of the gains for shares in recent years has come from growth-focussed companies that look better value when inflation and rates stay low. A rise in rates - particularly if that is accompanied by commentary warning of more tightening to come - could present another test for markets this week.

With markets depressed, investors need to be brave to stick to their savings plans. Yet Investing success tends to come via investing in both the good times but also the tough times, when the risk is less comfortable but the potential for recovery is higher.

Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Tax treatment depends on individual circumstances and all tax rules may change in the future. 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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