The latest interest rate decision from the Bank of England is out. As investors and analysts pore over the hard numbers (+0.5% to a base rate of 2.25%), we put on our consumer hats – what does this all mean for borrowers, savers, investors and home-owners?
What will today’s rise mean for borrowers?
In effect, the cost of borrowing will go up and take money (that may otherwise have been earmarked for discretionary spending), out of the economy.
Of course, where the cost of borrowing has been fixed by the borrower, it has no immediate impact; but as and when the fixed rate expires, the impact will be felt.
What impact will it have on the property market?
It is likely to create a deflationary effect within the property market, as buyers and lenders alike will have lower margins on affordability. This is part of the expectation of central bankers. There is demonstrable evidence that links rising house prices with increased confidence and demand from consumers. At a time of rising inflation – above Bank of England target levels – policymakers will seek to reduce the house price rises.
What will it mean for savers?
It should, in theory, relate to higher interest rates for savers. However, the rises can take some time to manifest in retail savings products – mainly because banks and other institutions will hedge their products against prevailing rates for a fixed period and this period may need to expire prior to a new rate being made available.
What will it mean for investors?
This all depends on wider market expectations. The general consensus is that higher interest rates (and the expectation of rising base rates in the future) is negative for the capital markets, but the true position is much more nuanced. The increase of 0.5% earlier today could potentially be reflected in opposing views:
- As the actual rate rise was seen as lower than that generally expected (say, an expectation of 0.75% hike) this can be taken favourably…
- However, if the market feels as though inflation will not be controlled by a weaker measure and will continue to represent a significant headwind to corporate earnings, it could react unfavourably.
What impact will it have on Sterling?
Similar to the capital markets, much depends on the confidence that currency market makers – whether that be participants or associated brokers – have on the economic impact of the measures. This can also vary in the short term and long term and can lead to variances in both.
How could it impact tomorrow’s mini-Budget?
We believe it is fair to comment on the opposing strategies of fiscal and monetary policy. On the one hand, the BoE is seeking to control rising prices by increasing base rates, whereas the government is seeking to create opportunity and positive reaction (and thus create inflation) by stimulating the economy through widely-expected tax cuts for business and households.
There is no indication that any change of course will result from today’s announcement. However, you would hope (nay, expect) that the new Chancellor has monitored and factored in the position to his own thinking.
