Following the Monetary Policy Committee’s decision to raise the Bank of England base rate by 0.50% to 5%, the 13th consecutive rise in a row, we consider the wide-ranging implications.
James Batchelor, Chartered Financial Planner:
A lot of people will naturally now be wondering ‘how much higher will rates go?’ particularly as this latest rate rise marks the 13th consecutive time that the bank has hiked the cost of borrowing.
As ever, it’s important to see the context around today’s decision. The Central Bank is raising interest rates as a means of controlling inflation, which is currently running at 8.7% in the 12 months to May 2023. Not only is this manifestly higher than the official target of 2.0%, but core inflation (stripping out volatile food and energy costs) was 7.1 % for the same period. This suggests that rising prices are becoming embedded in the economy and in people’s expectations.
Potentially as a result of this, wages grew at an annualised rate of 7.2% to April 2023, indicating that people are negotiating and getting correspondingly higher pay settlements. Significant pay rises tend to entrench inflation, because they cause businesses to have increased costs, which creates a spiral of needing to charge higher prices, which in turn causes the public to demand higher wages again.
With prices for goods rising so sharply, the Bank of England is under pressure to fulfil its mandate and bring price rises back under control and the financial markets currently expect that interest rates will rise to 6% by December. This is likely to bring the current surge in prices to an end, but it might well be painful in terms of unemployment, and risks triggering a recession.
On the other hand, higher interest rates make life better for individuals who derive their income from cash savings, and elevated rates will be very welcome to them after more than a decade of near-zero returns. As ever, the Bank has a delicate tightrope to walk, in terms of balancing needs and consequences.
Nick Lambert, Chartered Financial Planner:
Although interest rates continue to look attractive for savers in terms of deposit accounts, it’s really important not to overlook the impact of tax and inflation, the latter of which is still high at 8.7%.
For monies that are not needed in the short term, investment into real assets, such as a diversified portfolio of global equities, is an established way to hedge against the erosion of inflation over a longer timeframe.
If we look at the MSCI World Index for example, which can be seen as a barometer of the global stock market performance, *the annualised return of this index from 1970-2022 is 10.6%.
*source: Dimensional Matrix Book 2023, Historical data – UK
Michael Wales, Mortgages Manager, comments:
We’ve already experienced a big jump in mortgage rates in early June, with increases of up to nearly half a percent, driven by concerns around rising interest rates, so there’s a good chance that mortgage lenders may have already largely priced in this latest base rate increase.
Affordability remains key in the current environment but we are already starting to see mortgage products coming back onto the market, after the cull at the end of May, where 10% of UK mortgage deals were removed within a week, according to data from Moneyfacts.
This mirrors the big reduction in mortgage products at the end of September last year in response to market volatility but it does appear that this time around, products are returning more quickly.
After years of interest rates remaining relatively static, this inflationary environment is unfamiliar for buyers and lenders alike, but it looks increasingly likely that it is something we’ll all have to become more accustomed to in the near and medium term.
