The raising of the Bank Rate to 0.5% last Thursday was the first interest rate rise in over 10 years. So has the tide turned, will interest rates now continue to go up – and if so, what impact will higher rates have on investor’s portfolios?
The increase was supported by seven of the nine Monetary Policy Committee (MPC) members and as always led to a good deal of immediate activity across bond, equity and currency markets. Sterling fell somewhat which helped UK’s multinationals push the FTSE100 upwards. It ended the week on a record high of 7,560.35.
In many respects, this is mainly a symbolic rise and merely reverses the 0.25% cut last year. The rise was also widely trailed and expected. Perhaps more important was the way the Bank of England (BoE) chose to communicate the rate rise. Rather than saying that the MPC would look to raise rates at every opportunity, the commentary that accompanied the announcement was pretty cautious, indicating that the markets should expect a further two rises next year, which is somewhat more gradual than was previously expected.
Part of this caution will be down to the effect of Brexit, which has caused some uncertainty, and with both consumer confidence and business confidence relatively weak, the BoE would be wary of potentially affecting the performance of the wider economy over the medium term.
So what will the impact be on investors? Despite the rate rise, interest rates are still ultra-low and are now back to the same level they were just after the credit crunch. This means savings rates are only just above zero whilst borrowing is still cheap. In reality, therefore, little has changed.
However, a gradual increase in interest rates could be good news for investors. This could mean that sterling remains relatively weak, and this would help the FTSE100 companies that are international in focus. For them, a weaker pound could work positively in currency exchange terms, and so boost their profitability and valuations. Similarly, a weaker pound could be good news for exporters.
Perhaps more significant for investors though is the general uncertainty caused by Brexit and the fact that the UK’s economic performance is lagging behind the rest of the world at the moment. Given that the UK markets are also hovering around record highs, it would certainly make sense to look internationally for new investment opportunities and to diversify - seeking to make your investment portfolio less UK-oriented.
These are of course generic comments. If you would like tailored help or advice with your financial planning and your investment portfolio, contact Kellands today.