Three of our advisers take a look at the Monetary Policy Committee’s decision to raise the Bank of England base rate from 4.25% to 4.5% in its latest May meeting, the 12th successive raise in a row.
James Batchelor, Chartered Financial Planner
This latest base rate rise will have surprised few people yet there remains in my view a lot of wishful thinking out there concerning the longer term path of both interest rates and inflation. The Office for Budget Responsibility (OBR), for example, predicts inflation will fall steeply from 10.7% in the final quarter of last year to 2.9% by the end of 2023. The Bank of England expects inflation to reach around 4% by the end of the year and fall towards its 2% target after that. Whilst this is certainly possible, there are several good reasons to think that it might not happen as predicted.
Firstly, UK pay awards are presently substantially higher than the inflation target, averaging between 5% and 7%. Large ongoing pay increases are likely to cause inflation to become ‘sticky’ and not fall back to the BOE’s 2% target easily. Other factors such as the soaring cost of food (up 19.1% over the year), the as-yet unknown impact of the Corporation Tax increase and the ongoing uncertainties over Ukraine may cause further inflationary effects. It’s also true that as the US and Eurozone continue raising their interest rates, the UK is obliged to follow suit, to avoid importing inflation as the pound weakens against the Dollar and Euro.
Anna Green, Mortgage Adviser at Progeny
As a mortgage adviser, you get asked a lot by clients to predict if interest rates will go up or down. Whilst none of us have a crystal ball, a good indicator is right in front of them, in terms of how mortgage lenders are pricing their products. Unusually, five-year fixes are generally being priced more attractively at present, with about half a percent on average between two and five year fixes. This could suggest that the majority of lenders are speculating that interest rates will fall again within five years, as opposed to the two-year timeframe, although what impacts mortgage rates in the long run is related to a variety of factors.
Nick Lambert, Associate Director at Progeny
A number of clients with lower risk ISA portfolios are currently eyeing the attractive cash ISA saving rates and questioning whether it’s worth staying invested in the markets. May’s 0.25% base rate rise may add further weight to their argument. Time horizons are key here however and cash savings are generally appropriate for shorter term goals of less than five years, so based on current market conditions, this could be worth consideration. However, if these ISA funds are intended as a long-term investment, then there is capital appreciation as well as yield to consider and moving into cash is unlikely to be a wise move.