Last week, the focus was on interest rates, with both the Bank of England and European Central Bank pronouncing on the cost of money. Opinion as to whether the monetary policy committee would hold or increase rates was pretty evenly divided but, in the event, it chose to raise rates to 4.75 per cent. Speculation is now rife that we will see rates at 5 per cent by the year end. In Europe, with rates standing at only 2.75 per cent ahead of the ECB’s announcement – and given the better tone to economic indicators on a variety of fronts – the increase to 3 per cent was hardly a surprise. Shares on both sides of the Channel were unsettled by the moves as investors came to terms with dearer borrowing costs and the clear concern that inflation was back on the agenda. Corporate activity remains a strong feature of the market, with groups vying to take control of favoured targets. This in itself is insufficient to put a reliable floor under share prices but the earnings season, which is over in the US and drawing to a close here, has delivered reasonable results and few disappointing features. In the US, the trend to higher profits has continued and brought the rating accorded to shares to a relatively low level in the context of the past two or three decades. But there are those who say a de-rating of equities is under way and has further to go. Arguably, we were due some downward revision as a consequence of the irrational exuberance of the late 1990s. The acceptable level of share valuations in comparison with bonds is a matter of conjecture, though, and most likely to remain dynamic. The immediate reaction to the first estimates of second-quarter US GDP numbers at the end of last month was to push Treasuries higher in anticipation of a pause in the Fed’s policy of monetary tightening. We will know by now what the decision was on interest rates by Ben Bernanke’s committee, so it would be wiser not to second guess short-term market moves, but it is fair to say that every cloud has a silver lining and that the reaction of central banks to reliable data tends to be much swifter and more flexible than used to be the case. At home, we have seen a recovery in prices from June’s lows. In many markets, more than half the falls that started in May had been recouped by the end of July. This also applied to emerging markets although there were exceptions such as India, Brazil, Turkey and, somewhat understandably, Israel. There is still an appetite for risk out there but caution appears good sense. Risks are ever present and further volatility could emerge. Perhaps it is a good time to head for the beach after all.