Governor of the Bank of England Mark Carney recently addressed an audience in Newcastle. He explained that the slowdown that gripped the UK in the first quarter of 2018 was due to poor weather and not the economic climate.
Now, the summer’s heat is just one of many factors helping household confidence and spending rebound. UK services companies saw business activity rise at the fastest pace for eight months during June.
It was unenthusiastic consumer spending and weaker economic growth that stopped the Monetary Policy Committee setting an interest rate rise back in May. It looks as though conditions may be better now.
Of course, nothing is certain. Last week saw another drop in inflation, removing one of the reasons for a rate increase. Deepening economic and political uncertainty thanks to stalled Brexit negotiations provided an extra reason to keep things just as they are.
For some commentators, the governor’s comments were a hint of a rate rise at the next meeting of the Monetary Policy Committee in August. The latest figures might suggest it will be delayed, perhaps to November, or even the new year.
Whenever it comes, it is likely to be relatively small, from 0.5% to 0.75%, and there will be winners as well as losers.
A rate rise will see around four million households with variable or tracker rate mortgages face increases in monthly repayments.
Most new mortgage loans are fixed interest rates, typically for two or five years. These rates started to rise as long ago as November. Then lenders began to see that more rate rises were on the way, but if you are on a fixed rate you will be safe until your fixed period ends. Some lenders will now allow fixes of up to 10 years, and if you are on a standard variable rate, it might be time to see if you could save by remortgaging.
But there is no need to panic. According to the Nationwide, a 0.25% rate rise will mean a £200,000 tracker mortgage would cost just £25 a month extra.
Savers may win (a little)
When base rates rise, savings rates should follow. But the effect will be nothing like as fast as it is on mortgages, and it might not happen at all. After the November rate increase, providers were slow to pass on the rise to account holders, and only delivered on a fraction of the full increase.
This is because banks and building societies make a commercial decision when it comes to setting rates. While they may increase their rates if they want to build up the level of deposits they hold, they may decide paying out more in interest would cost them more than it would bring in.
Returns on Cash ISAs seem to fluctuate with little connection to Base Rate and will probably remain rather unexciting. According to the Bank of England, returns on cash ISAs jumped significantly in January, with average returns going up from 0.36% to 0.94%. However, the average fell back to 0.63% by the end of June.
Retirees could be winners
Anyone whose retirement plans include buying an annuity might welcome a rate rise. An annuity is an income for life, which you can choose to buy with your pension pot when your retirement comes around.
Annuity rates follow the yields on long-dated government bonds, otherwise known as gilts. These yields reflect interest rates. They have also been rising, offering slightly better value for money, although returns are still likely to disappoint many retirees.
Winner or loser – what should you do?
Despite the uncertainties, the markets seem ready for a rate rise, and the Governor of the Bank of England seems to be hinting that it is close.
If you agree that a rate rise is imminent, it might be time to look at your own financial arrangements, and see if you need to make some changes, to your mortgage, savings and pension plans.
The Continuum team would be pleased to help.
The value of pensions and investments and the income they produce can fall as well as rise.
You may get back less than you invested.
poundsterlinglive.com – British Pound Edges Higher after BoE’s Carney Keeps Hopes of an August Rate Hike Alive – 5th July 2018
bbc.co.uk – Interest rates: What would a rise mean for you? – 17th July 2018
yourmoney.com – August rate hike ‘less of a dead cert’ after surprise inflation figures – 18th July 2018