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How Many Bank Rate Rises Will We See this Year?

In April, the UK’s inflation figures for March were released. Having been 6.2% in February, inflation had risen to 7%, the highest rate for 30 years. 

Across the Atlantic, the figures were even worse, as US inflation reached 8.5% – the highest since March 1981 – as the Ukraine war pushed up energy prices. In the US, it is almost certain that the Federal Reserve will increase interest rates by 0.5% this month, and a report from bankers JP Morgan suggested that rates here in the UK could rise a further four times this year. 

In his Spring Statement delivered on March 23rd, Chancellor Rishi Sunak said he expected inflation to average 7.4% this year, but at the time, no-one was really expecting the war in Ukraine to last into next year – as many military experts are now predicting. As many of our clients will have read, the war – along with the continuing problems in the global supply chain – will push up the price of fuel and food. 

Traditionally, the Bank of England has used interest rates to control inflation. At the moment, the bank base rate is 1%, and if JP Morgan’s prediction is accurate, we could well see base rates in the region of 1.75% to 2% by the end of the year, and some forecasters are even suggesting that inflation could rise above 10% in 2022.

Will a rate rise be enough to curb inflation? Higher interest rates will certainly mean higher mortgage rates and more interest to pay on credit cards and should start to curb inflation. 

However, the war in Ukraine – traditionally known as ‘the bread basket of Europe’ – presents a once-in-a-generation set of circumstances as Russian forces continue to blockade ports and prevent grain exports. 

The World Bank has spoken of a ‘human catastrophe’, forecasting a 37% jump in food prices this year. The BBC said that the war will cause ‘the biggest commodity price shock’ since the 1970s. 

So whether we see three, four or five rises in base rates may be immaterial as far as inflation is concerned. People will unquestionably have less money to spend, but they have to buy food – and, of course, the energy price cap is set to rise again in October, adding another twist to the inflationary spiral. 

For clients who are savers, rising interest rates should be good news – although you suspect that rates paid on savings accounts will remain historically low. Although the vast majority of world stock markets fell in April, the UK’s FTSE-100 index proved resilient, registering a small gain of 29 points. Again, a prolonged period of inflation will put pressure on company profits. 

Sources
Rapid rises in bank rate this year https://www.cityam.com/bank-of-england-to-launch-1980s-style-rate-hike-cycle-this-year/
Additional compliance following MPC meeting: Rates rise 0.25% to 1% – economy to shrink https://www.bbc.co.uk/news/business-61319867
ING view on rates https://think.ing.com/snaps/bank-of-england-hikes-rates-as-committee-grows-more-divided

What will happen to Interest Rates in 2022?

As many of you are aware, one of the great worries, as the world recovers from the pandemic, is inflation. Late last year the Bank of England suggested that inflation ‘might reach’ 5% in 2022. A week later the figures for November came out showing that inflation had already reached 5.1%. 

The UK is not alone. In Germany inflation reached 5.2%, the highest figures since 1992, while in the US it hit 6.8% – a level not seen for 40 years. 

Traditionally, one of the principal tools used to counter inflation is interest rates – and in December the Bank of England responded to the inflationary pressure by raising rates to 0.25%. It is, though, a delicate balancing act – at roughly the same time as the Bank was raising rates, figures were released showing that the UK economy had grown by just 0.1% in October last year, with growth for the third quarter of the year revised down to 1.1% from the previous figure of 1.3%. 

With supply chain problems continuing, economic recovery from the pandemic is going to be unpredictable and difficult – and it will not be helped by rising interest rates. But neither will it be helped by rising inflation, which also erodes the real value of clients’ savings. 

So what will happen to interest rates in the next 12 months? Some pundits are forecasting that inflation in the UK could well reach 6% before it starts to stabilise, so we may see gradual rate rises through the coming year – after all, December’s rise was the first time rates have risen in over three years. 

This approach is likely to be mirrored elsewhere: in the US, for example, the consensus now seems to be that there will be two or three increases in interest rates next year, as the Federal Reserve looks to keep inflation under control. 

The question is whether those increases in interest rates will be reflected in better rates for savers? The more sceptical among our clients will expect a repeat of what nearly always seems to happen. Mortgage rates rising almost immediately: rates on savings rising slowly, if at all. 

It is important, therefore, that clients keep a sharp eye on their savings, and on the interest rates they are receiving. Inflation of 6% set against an interest rate of say, 0.25% (or lower, in many cases) will very quickly erode the value of savings held on deposit. It goes without saying that we are always here if you need any help or advice on savings rates, or any other aspect of your financial planning, and that we will always check the savings rates our clients are receiving as part of our regular review process. 

interest rate rise: what does this mean?

goldfish jumping from small bowl to big bowlThe Bank of England has raised interest rates from 0.5% to 0.75%, only the second rise in a decade. Currently, interest rates stand at their highest since 2009 and reflect what the Bank of England perceive as a general pick-up in the economy.

The Bank said that a rise in household spending has strengthened the British economy. Economic growth for the year is predicted to be 1.4% this year and the unemployment rate is expected to fall further below 4.2%, where it currently stands.

How does the rise affect you?
If you are on a variable rate ‘tracker’ mortgage, your repayments will increase. For example, if you have a £100,000 mortgage, this will add £12 to your monthly repayments.

It’s important to highlight that if you are on a fixed rate mortgage, your payments will stay the same until your base rate comes up for renewal. The Bank of England’s announcement does not mean that your rates immediately rise.

For prospective borrowers, the interest rate rise signals a change in the Bank of England’s tone. Further rate rises are a definite possibility. However, the Bank’s governor took a rather cautious tone which indicates that there are unlikely to be any more rises until 2019.

For the time being, base rates on mortgages are unlikely to rise above 3%. That said, the demand for rate fixes will be higher than usual this year.

Unfortunately for those of you going on holiday, after the announcement the pound fell by 0.9% against the dollar. This is due to the extreme political uncertainty surrounding the sterling with Brexit taking an unchartable track.

Reactions from U.K. businesses have been a mixed bag. The Institute of Directors, which represents about 30,000 members in the U.K., has said, ‘the Bank has jumped the gun’, whilst the British Chamber of Commerce similarly described the decision as ‘ill-judged’ at an uncertain time.

This negative perspective wasn’t unanimous among all lobbying groups. The Confederation of British Industry, the country’s biggest business lobby, welcomed the rise saying the case for higher rates had been building.

A small rise of 0.25% is likely to have a minimal impact on your finances. However, larger hikes down the line could have a substantial effect on the British financial landscape.

Sources
https://www.bloomberg.com/news/articles/2018-08-02/pound-fails-to-shake-off-blues-despite-unanimous-boe-rate-hike
https://www.theguardian.com/business/2018/aug/02/how-will-interest-rate-rise-affect-mortgages-savings-and-property
https://www.bloomberg.com/news/articles/2018-08-02/-mark-carney-what-have-you-done-cry-u-k-business-bodies?utm_source=google&utm_medium=bd&cmpId=google

what does the first interest rate rise in ten years mean for you?

After months of speculation, the Bank of England finally raised interest rates in the UK for the first time in over a decade. The increase from 0.25% to 0.5% might seem small, especially when you consider that the last time the interest rate was increased in July 2007 it was up to 5.75%, but the fact that interest rates are going up at all after more than ten years at rock bottom is significant.

The rates rise will have an impact on the finances of millions of people in the UK, with those on variable rate mortgages likely to lose out the most. 46% of households with a mortgage are on either a standard variable or tracker rate, which are likely to move at the same time as the official bank rate.

These mortgages have an average of £89,000 left to pay off, resulting in a monthly payment increase of around £12. Those with higher variable rate mortgages will of course see their outgoings increase by a higher amount: payments on a £300,000 mortgage will go up by about £39 a month. Homeowners with fixed rate mortgages meanwhile can expect their payments to remain the same for some time following the interest rate lift, as can those with loans and credit cards to pay off.

Savers are likely to benefit from the rates increase having seen little growth on their savings for a number of years. On average, an easy-access savings account currently pays interest at 0.14% annually, meaning that £10,000 worth of savings would generate just £14 every year. If providers choose to pass on the rates rise in full, this will add another £25 to earn £39 annually. A typical ISA meanwhile will see the annual growth of £10,000 increase from £30 to £55.

Pensioners who have purchased an annuity can also expect to benefit from the rates rise. Annuities follow the yields on gilts, or long-dated government bonds. In anticipation of a rates rise, these have also increased, meaning those purchasing an annuity for retirement will receive better value for money on their investment. In November 2016, a joint annuity bought for £100,000 would receive an annual income of £4,086. That figure has risen this month to £4,468 and could continue to go up depending on how likely further base rate increases are – something which the Governor of the Bank of England, Mark Carney, has indicated is likely over the next few years.

Sources
http://www.bbc.co.uk/news/business-41846330
http://www.bbc.co.uk/news/business-41831777
http://www.telegraph.co.uk/money/special-reports/will-happen-investments-interest-rates-rise/