What’s the impact of interest rate rises?

THE Bank of England has announced it is raising interest rates from 0.5% 0.75% — the highest level for 10 years.  Everyone expected a hike in May, but it never came. It’s finally here and this is what it means for the different corners of the financial world:

Savings

An interest rate rise might bring hope to many that they will get a better return on their savings. But there are two reasons that might not happen. Firstly, banks and building societies are not bound to pass on any Bank of England rate rise. It’s at their own discretion. Many rates didn’t increase when base rates last rose in November 2017. Even if they do decide to up rates on savings accounts this time round, they might pass on the full 0.25%.

Secondly, savings providers often increase rates on newer accounts being actively marketed and ignore the old savings accounts that pay next-to-nothing. Skipton building society announced on the same day that ‘on-sale’ accounts only would see a rate rise. Someone with a £5,000 savings balance benefiting from a 0.25% rate increase will see their monthly interest income rise by £1.04 per month — a step in the right direction but no reason to celebrate. Check what rate your savings are earning and use a comparison website such as moneyfacts.co.uk to find the highest paying account that suits you – and switch.

Borrowing

The cost of borrowing will rise for consumers. The interest rate hike is likely to hit more than 3m homeowners, according to trade body UK Finance. Its latest figures show 1.3m borrowers are on tracker mortgages linked to the official Bank rate and a further 1.8m on lenders’ standard variable rates (SVRs), which are also likely to move higher.

Anyone on a fixed rate mortgage won’t see any increases to their monthly repayments, but inevitably, fixed term mortgage deals will also see a jump in interest rates as the banks adjust their offers in response. Anyone who needs to remortgage soon will see higher rates. However, there are still plenty of good deals available.

Investment

The FTSE was unchanged by the news of the interest rate hike. Indeed, the market was well-briefed — this increase was long expected and so has been priced into the markets, particularly after the expected rate rise in May. The market is even pricing in another hike around this time next year. Experts maintain that there shouldn’t be a great deal of disruption for stock markets as long as rises are gradual. It’s only steep hikes that could spark a major upheaval.

New investors or those reviewing their portfolios might want to consider which sectors and which companies may benefit from rising rates. The biggest beneficiaries from rising UK base rates are likely to be the big importers and the UK-dominant banks. Indeed, banks and other financial stocks tend to enjoy fatter profit margins in rising interest rate environments, which also serve to provide a lift to earnings and ultimately their share price. Banks make good money on charging borrowers higher rates while probably only paying a little more to savers.

Changes in interest rates will affect the value of bonds. If rates are rising, newly issued bonds with higher rates on the market will be more appealing than older bonds in your portfolio paying less. This situation can reduce demand for your existing bonds and push down their resale value.

Pensions

Annuity rates are tied to interest rates, so, as interest rates rise, annuity rates will follow, making them more desirable for retired investors who need a guaranteed income. Shopping around for the best annuity is the smart move to get the highest income. This is particularly important for around two thirds of retirees who now qualify for higher levels of income because of their health or lifestyle.

Photo by Jungwoo Hong on Unsplash

Article is accurate at date of writing.