Bank raises interest rates

For only the second time in a decade, we have an interest rate rise. This was heavily trailed, and as expected, the rate has been raised from 0.5% to 0.75%. This represents the highest bank rate level since March 2009.

The Bank was expected to raise interest rates back in May, but held off because the UK economy started the year poorly, affected amongst other things by the weather conditions, aka ‘the Beast from the East’.

Some, including the Institute of Directors, feel that even now this rate rise is premature, as they believe consumer and business confidence are still fairly fragile pre-Brexit.

However, the Bank believes the economy will improve from the 0.2% growth rate seen in the first quarter, to 0.4% in the second quarter and maintain that pace later in the year. It also intimated that further rate rises could follow, though these would be "limited and gradual".

This should be good news for savers, who could see interest rates increase on their savings over the next few months. However, past experience would suggest that savers shouldn’t hold their breath, as the last rate rise in November 2017 didn’t see much movement, if any, in building society and bank savings rates. As always, it makes sense to look around for the best rates, and to consider putting some of your money into some fixed-rate deals to boost your returns.

For the millions of people with variable rate or tracker mortgages, it’s obviously not such good news, as it will see their mortgage interest costs increase.

For investors, it means little change. The rise had already been effectively priced into the markets, so there was little immediate impact on the FTSE100 and sterling after the announcement. The show of confidence from the Bank of England could also possibly generate more optimism around UK domestic equities.

For retirees, a rate rise is potentially good for those looking to buy an annuity - a financial product that provides an income for life. Annuity rates follow the yields on long-dated government bonds, also known as gilts. These yields could be expected to rise in an environment of rising interest rates, thereby providing better value for retirees when they buy an annuity. However, as with savings rates, annuity rate rises tend to be a slow process.

In terms of the outlook going forward, after the Bank’s indication of future rises, the financial markets have already taken this on board and are forecasting one or maybe two rises of 0.25% before 2020.

So nothing earth shattering in the near future and nothing to suggest that interest rates will return to 5% and above. Indeed, with the economy still relatively weak and uncertainties about Brexit, it should be remembered that rates can still move in either direction.

For more information or financial advice, please contact Kellands.

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