The Bank of England is indicating the interest rate will increase in the coming months, so it may be a good time to review your investments.
The Bank of England held the interest rate at 0.5% in May, but its Governor, Mark Carney, reiterated the view that rates will probably need to increase if the inflation goal is to be met. These future increases are likely to be “at a gradual pace and to a limited extent”.
Interest rates are already increasing in the US. Short-term rates (for loans with a maturity of less than one year) there could reach around 3.4% by the end of 2020, double their current level, according to forecasts from rate setting members of the US central bank, the Federal Reserve.
The economists’ term for what is expected to happen to interest rates in the UK and US is ‘normalisation’. For the rest of us, it means a steady increase. The current rate of 0.5% was once thought of as an ‘emergency rate’ where 3–6% would be more representative in the long term.
The Federal Reserve started raising rates from its historic low at the end of 2015. Despite many threats to do the same, the Bank of England cut rates in August 2016 in response to the Brexit vote. With hindsight that was probably an unnecessary move, a point arguably confirmed by the reversal of the cut last November.
IMPACTS OF RATE RISES
Increases in short-term UK interest rates could have a variety of consequences:
- The values of fixed interest securities, such as government bonds (gilts), could fall. Much will depend upon how long-term interest rates, for ten-year government bonds, react – these may not necessarily follow the short-term rates.
- Share values could fluctuate further. Banks traditionally benefit from rising interest rates, while companies that have borrowed heavily can suffer.
- The value of commercial property could come under pressure, although rental yields are currently comfortably above the income available from gilts.
If you have not done If you have not done so already, it may make sense to review your investments now in preparation for rising interest rates.
The value of your investments, and any income from them, can go down as well as up and you may not get back the full amount you invested.
Past performance is not a reliable indicator of future performance.
Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.
Correct as of 10 May 2018.