The Bank of England has decided to raise interest rates for the first time in a decade. The Monetary Policy Committee voted by 7-2 last week to increase the base rate from 0.25pc to 0.5pc – the first increase since mid-2007.
Is this the right thing to do? Patrick Brusnahan asks experts on the matter
Eric Leenders, head of personal, UK Finance:
“Whilst this is a small rise from a historically low base, anyone who thinks they may find it difficult to manage their finances should always contact their provider as soon as possible to discuss the support that’s available to help them. With most mortgage and personal loan holders, as well as businesses and credit card customers paying a fixed rate, many will see no change while their current deal lasts.
“Given that lenders offering variable rates assess a customer’s ability to pay at much higher interest rates, most should be able to cope with any increases as they filter down. Lenders consider a number of factors when deciding how to respond to a change in the base rate, and in this competitive environment where it’s easy to switch providers, customers who are thinking about borrowing money should shop around to take advantage of the best deals on offer.
“Savers will welcome a rate rise, although the effects may not be felt immediately because banks will be looking to balance the increased cost of customer borrowing with the savings returns they offer.”
Emmanuel Lumineau, CEO, BrickVest:
“Today’s announcement is momentous for the UK economy and should signal the start of a series of gradual increases. The Bank of England has decided that inflation is potentially getting out of control and the economy now requires higher borrowing costs. The decision also signals that the UK economy has not performed as weakly as the Bank predicted last year.
“Increasing interest rates has a direct impact on real estate. Higher interest rates and rising inflation make borrowing and construction more expensive for owners, which can have a constraining effect on the market but can also lead to an increase in property prices. There has certainly been an abundance of international capital flowing into real estate, almost every major institutional investor globally has been increasing their portfolio allocation to real estate over the last five years mainly because of lack of alternatives.
“We continue to see the highest level of volatility from the office sector as many international firms currently headquartered in the UK put decisions on hold over their long-term office space requirements.
“If the UK no longer gives businesses access to the European market, they may need to spread their staff across multiple locations to more efficiently access both the UK and European market. Indeed our recent research showed that 34% of institutional investors believe the biggest real estate investment opportunities will be found in the office sector and the same number in the hotel & hospitality industry over the next 12 months.”
Vince Smith-Hughes, retirement expert, Prudential
“Rising interest rates will be welcomed by retired people who often have a large proportion of their savings in deposit accounts. Rising inflation has eroded their retirement income as deposit accounts fail to keep pace with inflation. The rise in interest rates will hopefully see better returns from savings accounts. Using the right wrappers to minimise tax is also important.”
Timothy Graf, head of macro strategy for EMEA, State Street Global Markets
“Though they aren’t likely to say so explicitly, the messaging around today’s rate hike suggests it could be one and done for the BoE. Conscious that potential UK growth is likely lower as a result of Brexit, persistently above-target inflation is their justification for today’s move.
“However, once the effects of sterling depreciation pass out of inflation calculations, the still-weak growth and output profile offer little support for a more prolonged tightening cycle. Before today, market pricing for rate hikes over the next two years by the MPC equalled that for the Federal Reserve. The logic behind these expectations is sure to be tested and we believe sterling weakness in response to this dovish hike is more than justified .”
Sudhesh Giriyan, COO, Xpress Money:
“While the Bank of England’s decision to raise interest rates by 0.25% doesn’t look like a lot on the surface, the potential impact on those working in the UK and sending money across the world to loved ones is massive. On one hand, those who have been able to save are going to benefit, as for the first time in a number of years they’ll have a larger return on their money, giving them more disposable income. Remittances could be a benefactor of this.
“On the other, those working off loans and tracker mortgages, could get affected as banks and loan companies may look to use this opportunity to their advantage. It’s really a catch 22 situation, and the impact on the UK and world economies is yet to be seen.”