Skipton Financial Services
Thursday, November 2, 2017 - 12:03

What does this interest rate rise mean?

After weeks of speculation and hints from the Bank of England, today the first rate rise in over a decade was confirmed.  

As markets predicted, base rate has returned to 0.5% - the level it remained at since 2009 until last June when it was reduced to 0.25% (following the EU Referendum vote).

So what exactly does this increase mean for savers and investors? Does it spell good news for the UK economy? And is it a sign of things to come? Our experts answer some of the key questions you may have over today’s rate rise; explaining what this could mean for the UK economy and more importantly, your finances.

First-things-first – following a string of hints from the Bank of England three years ago – let’s look at why they have finally decided to increase rates

Mitch Hargreaves, Money Market Analyst at Skipton Building Society, explains, "​This is a signal that the UK economy, in the Bank of England’s mind, is more resilient now than it has been at any point since the financial crisis.

Mitch Hargreaves

"Given the perceived fragility of the economic recovery, the Bank of England’s policymakers have in the past been cautious about raising interest rates too soon. This led them to look through periods of above-target inflation in the years following the crisis. This time, in spite of the continued uncertainty over Brexit, the Monetary Policy Committee is more confident that the economy is in a position to withstand a rate rise – albeit only to its initial post-crisis level."

Mitch continued, "Whilst the Bank of England’s forward guidance is for a gradual increase in interest rates, should the UK economy suffer another recession further down the line, the Bank has now given itself a little more flexibility in terms of policy options than if base rate had remained at 0.25%."

Will markets be affected by this rise?

Mark Elliott, Head of Technical Research at Skipton Building Society, says, "It’s hard to say whether it will have a significant impact on markets over the long-term. Ultimately, I suspect that the economy will weather it – because it is only going from 0.25% to 0.5%.

"Although that’s a 100% increase, it merely brings us up to the level it was pre-Brexit.

Mark Elliott

"Over the short-term, those invested in a range of assets may see a fall in certain areas – such as gold and fixed income – but property shouldn’t see much of a change.

"Rather than focusing on this particular rise, markets will be more interested in seeing whether it signals a change in interest rates going forward.

"Markets have predicted a rise for some time, so it isn’t a shock for them. Fund managers will have already factored in any potential impacts a rate rise could have had on their portfolio – and put certain measures in place to protect it. But a rate rise is just one of many factors they would need to consider – which I assume would be quite low on their agenda."

Is this the first of many? Or just a one-off?

Many experts are divided over the possibility of a further rise. Mitch noted, “Some economists believe this this is a ‘one and done’ rise – with the view that base rate dropped to 0.25% in the aftermath of Brexit and with the economy performing positively, the Bank of England have merely reversed last year’s rate reduction. However, those at the more hawkish end believe this is just the start."

Comparing the US and UK economy, Mitch added, “Although the US has witnessed two rate rises over 2017, even without the challenge of Brexit to contend with, the Federal Reserve waited a full year after their first rise in 2015 before raising their target interest rate range again.

“In spite of the uncertainty around President Donald Trump’s ability to pass his policy proposals through Congress, the US economy is still arguably in a more resilient position than that of the UK.  The Bank of England’s attitude towards further monetary tightening will be informed by how the economy reacts in the coming months.”

Mark concluded, “Whilst we are being more cautious than the US, if this rate rise works – that is, if the Bank of England can raise rates without it having much of an impact on the economy – they may have the confidence to continue to do so.” 

Is there light at the end of the tunnel for savers?

For years, savers have experienced significantly low interest rates – so the news of this long-awaited increase will no doubt please many.

But given the level of the rise, savings accounts rates across the market will most likely see only a small change. Mitch explained, “Whilst savers should see an improvement in the interest rates on offer, I believe the impact of this 0.25% rise is likely to be modest.  Although the Bank of England’s outlook is far more optimistic than it was a decade ago, base rate has only returned to the same level it was cut to in 2009.” 

Mark added, “This supports the fact that, although savings accounts are ideal for short-term financial needs, investing could still be the most appropriate route when planning over the medium to longer-term.

"Albeit, through investing you have to be prepared to accept risk to your capital – as the value of your investments, and any income from them, could fall as well as rise.”

Call us now on 0800 731 5342Request a Call Back

If you would like to receive information similar to this via email - please subscribe to our mailing list - click here.

Similar insights & resources

Why get financial advice?

When it comes to your money, seeking financial advice from an expert can have an equally positive impact on this hugely important area of your life. 

Coping with financial difficulties

It doesn’t matter how well off you are, almost all of us worry about money from time-to-time – and that anxiety can be exacerbated when it comes to coping with financial difficulties.

Financial scams – beware!

We feel it’s vital that you’re fully clued up on this subject, in case you’re ever targeted by a fraudster. So we’ve provided useful information on what to look out for, what to do if you’re ever approached and various types of scams.