Today, the Bank of England (BoE) has reported that it’s Monetary Policy Committee (MPC) has voted by 6 votes to 3, for its fifth straight rate hike as it raised rates by 0.25% to 1.25% in its attempt to fight the ongoing battle with inflation.
UK inflation is currently at a 40 year high, with the latest data showing an annual rise of 9% to April, with huge impacts on the economy and on consumers daily lives. By raising rates, the BoE is attempting to limit the damage to the economy from such inflationary peaks, which are expected to hit double digits soon.
The Bank of England says that it now expects inflation to peak at above 11% by October.
But what does this move by the BoE mean for investments, markets and advisers’ clients? Some leading commentators have shared their views with us following today’s news:
Jonny Black, strategic director abrdn, Adviser, said: “On top of supporting on savings and investment strategies, advisers have a key role to play in explaining what the highest interest rates since 2009 mean to clients in basic terms, including why it’s happening, what could happen next and where it sits in a wider economic and historical picture.
“Clients will naturally have concerns. And, for some, this could be the first time that they’ve been exposed to anything other than record low rates, while having access to a professional they can speak to about it. The ability to speak to a trusted adviser to get the context behind headlines will give them confidence, and re-assurance alongside the practical guidance they need to protect their financial interests.”
Martin Brown, managing partner at national IFA firm Continuum, said: “Whilst we have seen several rises to the base rate since December, today’s rise of a further 0.25% to 1.25%, could have a quick and strong impact on savers, pensioners and home buyers.
“Cash savers could be forgiven for thinking that their money will likely see better returns following today’s announcement. However, unless banks start to offer interest rates matching the high levels of inflation being felt across the country, they could still be losing money in real terms. At Continuum we believe that the chances of banks offering rates meeting inflation any time soon continue to be very low.
“Therefore, cash savers may find they would be better off considering putting their money into an investment, such as a stocks and shares ISA account.
“A diversified investment portfolio offers the opportunity for longer-term savers to have the potential to grow their funds above the rate of inflation. The value of investments can fall as well as rise so savers should make sure they get independent financial advice to make sure their money is working its hardest for them.
“Rate rises and other measures to tackle inflation mean complications for many aspects of financial planning, but particularly for pensions.
“A client’s pension needs to last the whole of their retirement, which could easily be 20 years long or more, and be enough to pay for care if they need it.
“With further rate rises seeming likely in the near future as the Bank of England continues to attempt to tackle rampant inflation, the best step those affected can take is to seek independent financial advice.”
Martin Lawrence, Director of Investments at Wesleyan, the specialist financial services mutual, said: “Faced with runaway inflation, the Bank of England was under immense pressure to act urgently, so today’s announcement is no real surprise. We expect further interest rates rises tipping towards three percent in the months ahead; however, the MPC’s hands are partially tied in that they can’t raise rates too high or too quickly, or else risk smothering the UK economy.
“Higher interest rates can be good news for those with cash savings, but only when providers pass on the base rate to their customers. For those who are fortunate enough to have money in savings, they should be considering all options to maximise their financial returns, such as investing in Stocks & Shares ISAs and other products that look past short-term volatility with the aim of long-term gains.”
George Lagarias, Chief Economist at Mazars Wealth Management comments: “The move, widely expected by markets, needs to be seen in light of the Fed’s very aggressive tightening yesterday. Growth is already slowing significantly, so the Bank chose a more paced approach than the Fed to avoid putting too much pressure on consumers. Having said that, three members voting for a larger hike suggests more pressure on rates going forward. We believe that we are in a new era for central banks, where lowering inflation is their only objective, even at the expense of financial stability and growth. As investors, we are worried about how much and how fast economic growth will slow and how markets will react as they realise they need to search for a new paradigm.”
Finn Houlihan, Managing Director at Arlo Group comments:
“As expected, the Bank of England interest rate has increased by 0.25% to 1.25% this morning, despite calls for a larger increase to curb inflation. This is still an incremental increase since December when the rate was at its lowest ever level of 0.1%, and marks the highest the rate has been since the start of recession in 2009.
“Whilst the change is being implemented to mitigate the impact of inflation on households and businesses that are already struggling with an increased cost of living, higher rates continue to hit those on variable rate mortgages, not to mention those who are coming to the end of a fixed term with higher bills.
“Looking forward and, with Tuesday’s low unemployment data, it seems likely that the Bank of England will continue to raise rates to avoid another recession and consumers will be the ones to lose out.
“This is where professional financial advice will play a significant role as advisers can review their clients’ income and expenditure to help them mitigate the impact. The government’s cost-of-living package will help but people will need more support in evaluating whether they have enough disposable income, whether they can live comfortably on their pensions and savings when approaching retirement, and whether they need to reassess their financial situation.
“It is likely that we will see further interest rate rises in the future and there will be another energy price cap in October which will further impact finances. However, there are still areas where people can make money and it is an adviser’s role to make sure they are as tax efficient as possible.”
Kevin Brown, savings specialist at Scottish Friendly, comments: “By raising interest rates in quick succession the Monetary Policy Committee is desperately trying to curb inflation.
“It may be that the speed at which prices have risen this year has been underestimated. Although the central bank finds itself in a difficult position with factors at play that are outside of its control, we cannot forget that consumers are stuck between a rock and a hard place.
“Living costs continue to rise and could spike sharply again in October when the new energy price cap comes into effect, and with interest rates going up many UK households are also facing higher borrowing costs.
“Savers should benefit from rising interest rates, but in a cost-of-living crisis many households will be more concerned with their bills going up, rather than the possibility of earning a few extra pounds on their savings.”
Adrian Anderson, Director of property finance specialists, Anderson Harris wonders when these hikes will end commenting: “The interest rate hike today to 1.25% is no surprise after the US made its biggest interest rate rise in almost 30 years yesterday.
“Inflation is running red hot and this interest rate rise means higher borrowing costs for mortgages, credit cards and other loans.
“The question I keep on being asked is ‘When will these rate hikes stop?’ and I don’t think the MPC know the answer to this question. The Bank of England are playing catch up as at the beginning of the inflation crisis we were told this is a temporary issue due to supply chain problems and this is clearly not the case.
“This is not a UK problem but a huge change for the global economy as Australia, Canada, Brazil have also raised rates and the European Central Bank have outlined plans to increase rates over the summer.
“We are encouraging homeowners to remortgage as early as they can and are contacting our clients 6+ months in advance rather than the usual 3-4 months before a rate renewal due date.”
Dominic McLoughney, director at Wyrefields-based Becketts FS: “The cost of living is clearly on everyone’s mind and managing inflation is the Bank of England’s remit. That being said, we don’t believe we should just follow the Fed in all the action they take. Our economic position is quite different to the US with a much greater supply side inflation push. Policy error in interest rates would be much more likely to push the UK into a deeper recession than we are already likely to hit. Therefore growth in the economy must be balanced with some form of inflation curbing.”
Scott Gallacher, a Chartered Financial Planner at Leicestershire-based independent financial advisers, Rowley Turton: “As predicted, the Bank of England has increased rates by 0.25%. This will be a welcome, albeit small, boost for hard-pressed savers, provided the banks actually pass this onto them. But it’s a kick in the teeth for borrowers already struggling with the cost of living crisis. Given the Governor’s previous call for people to exercise wage restraint, I suspect this announcement will not go down well with the vast majority of working people.”
Samuel Gee, director at Bristol-based Manning Gee Investments: “It’s no surprise that rates were raised again. The Bank would be seen to be doing nothing to battle inflation if they didn’t but by doing so it makes people think all the more about their spending decisions, worry about the rising cost of debt in every area from mortgages to credit cards. For these people the worst is far from over. Rising debt costs, rising energy costs are undoubtedly here to stay for the short term.”
Graham Wells, financial coach at Haddington-based GroWiser Financial Coaching: “Thursday’s rise in interest rates won’t come as much of a surprise. But whether or not a 0.25% increase is a good move won’t be known for many months. That’s the trouble. The Bank of England is tasked with predicting the unpredictable. Savers and borrowers would do well not to fall into the trap of trying to predict the future. There’s little point in hoping that savings rates will go up to boost your nest egg, because rising interest rates usually go hand in hand with rising inflation. The net return on bank deposits will always be close to zero or negative, so appropriate longer term investing is crucial. For borrowers who require certainty, it can be wise to lock in to deals for a number of years. For example, those with fixed rate mortgages will not be affected by today’s rise. The real challenge lies with many businesses, which may be faced with a double whammy of higher borrowing costs, combined with declining demand for goods and services.”