What does the Bank of England's rate rise to 0.75% mean for your mortgage, savings, investments and finances?

 

The Bank of England today raised interest rates to 0.75 per cent, nearly a decade since it was reduced to 0.5 per cent.

The rise comes with confidence in the economy rebounding after a blip in the first three months and estimates that wages will improve in the coming months.

 

Interest rates fell to 0.25 per cent in August 2016 before heading back to 0.5 per cent last November.

The Monetary Policy Committee voted 9-0 in favour for the rise today. Bank of England Governor Mark Carney said: 'Rate rises are expected to be limited and gradual.

 

'Rates can be expected to rise gradually. Policy needs to walk - not run - to stand still.'

 
 
 

Why did rates rise today?

 

Bank of England raised rates unanimously today to 0.75 per cent. 

Economists and investors had expected the Bank to raise rates, because there had been no signal sent out that it would hold fire, unlike before the May MPC meeting and inflation report when Governor Mark Carney reined in expectations in the weeks before.

The Monetary Policy Committee's chief remit is to target inflation of 2 per cent, with interest rate rises used as a brake on the economy.

By raising the cost of borrowing, an interest rate rise reduces demand and leads to banks creating less money when they issue loans.

A lower level of money creation is seen as reducing inflationary pressures from wage rises and spending.

With unemployment at record lows and slack in the economy dissipating, economists suggest inflation may overshoot without a rate rise.

There is also an argument that the Bank should raise rates now while the going is good, to give itself wriggle room when a recession hits in future.

What does this mean for savers?

 

It is no secret that Britain's army of savers have had a rough time of it in recent years, with decent returns becoming increasingly difficult to obtain.

The rate rise today gives a small nugget of hope for those who are facing up to a best buy easy-access account paying just 1.4 per cent and top two-year fix of 2.2 per cent – below inflation of 2.4 per cent. 

James Blower, of independent website Savings Guru, said: 'Sadly, we expect the rate rise to make little difference to savers. It is competition and demand from new savings providers - there have been almost 40 new entrants since 2009 - which is driving savings interest rates.

'We see little reason why this will change, regardless of the base rate rise, as it has been completely out of sync with it for several years.

'We may seem some smaller building societies pass on some or all of the rate rise but the larger banks and building societies still have more savings deposits than they need. 

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'We think they are therefore likely to pass on little or none of the benefit of any base rate increase to their savers, instead using it as an opportunity to improve their profits.'

Anna Bowes, co-founder of independent advice website Savings Champion, said: 'Finally. Savers have been waiting long enough for a positive move in the base rate, as we’ve been stuck with record low rates for almost a decade. 

'This latest move has been a long time coming. However, savers cannot afford to be complacent. 

'The link between the base rate and providers' savings rates has detached over the years and some providers didn’t increase rates at all following the last rise in the base rate – others by far smaller margins than you would expect.'

Last time rates went up - from 0.25 per cent to 0.5 per cent - some providers vowed to pass it, including Nationwide and Newcastle Building Societies, on some savings products. In the aftermath, others followed suit.  

However, this time around, there hasn't been the same promise.  

The reality is, not many savvy savers will have a variable saver, given the low rates they offer.

What they are likely to want to see is rises in accounts which offer monthly interest, or on easy-access, fixed-rate and tax-free cash Isa deals.

Whether this happens remains to be seen. 

After all, interest rates were at 0.5 per cent for nearly a decade and rates were in the doldrums before they went down to a record low of 0.25 per cent.  

Calum Bennie, savings specialist at Scottish Friendly: 'Today's rate rise means that Mark Carney has probably shaken off his tag of being the "unreliable boyfriend" for good. 

'While the decision indicates the UK's economy is picking up steam, it also means higher borrowing costs, so households must be even more prudent to absorb the additional cost. 

'The move is good news for savers but still cash account rates are unlikely to beat inflation, so stocks and shares Isas remain better for those looking to grow their savings long-term.'   

 

Recent history of base rate:

 

What does this mean for homeowners?

The rate rise will have little impact on a large number of mortgage borrowers, as these days many are on fixed rates and so won't see any immediate increase.

While Britain's savers have been longing for a rate rise, borrowers have been enjoying cheap mortgage deals for years, and many will have fixed into low rates over the last year or two.

For new buyers however, lenders are likely to axe their cheapest deals following today's rise.

Those on tracker mortgages will see a rise in their monthly payments if their deals track the Bank of England base rate.

Around 3.5million residential mortgages are on a variable or tracker rate. For those, the picture is less clear.

Lenders can move these rates as they choose, though it is likely that most will pass on the rate rise to their customers. 

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Robert Gardner, chief economist at Nationwide Building Society, said on an average variable mortgage, an interest rate increase of 0.25 percentage points such as today's would increase payments by around &16 a month, or &192 extra per year.  

Meanwhile, credit agency Experian calculates the 0.25 per cent increase will mean a typical borrower on a standard variable rate or tracker mortgage would be forced to find around &400 a year extra.

Its figures are based on a typical SVR deal of 3.99 per cent or a tracker two per cent above base rate on a 20 year mortgage worth &250,000.  

That said, mortgage rates remain near record lows and house prices are rising, so good deals can still be found.

Andrew Montlake of mortgage broker Coreco said: 'Rates are up slightly over a longer period so fixed rates may already have a rise priced in.

'Competitive pressure remains high though so lenders will be keen to take in as much business as they can.'

David Hollingworth, mortgage expert at L&C Mortgages, adds: 'Although many borrowers do appear to have looked ahead and have sought to fix their mortgage rate, those that have failed to do anything so far may finally be triggered to revisit their situation.

'Although rates have been drifting upwards since the run up to the last rate hike, the fixed rate options are still very competitive. 

'Those most vulnerable to rising rates will be borrowers on their lender's SVR.' 

Bank of England: Rates were increased today from 0.5% to 0.75%

Will it hit house prices?

Rising interest rates tend to dampen the property market, as they push up mortgage rates and knock confidence.

Even a quarter point rise, such as today's, means that lenders may have to dial down how much they dish out – and in places where house prices are stretched the furthest, such as London and the South East, this is likely to have some effect.

However, providing the economy does not weaken further, the impact on UK house prices is likely to be modest, according to Nationwide.

 

 

Nationwide's Robert Gardner said: 'Looking further ahead, much will depend on how broader economic conditions evolve, especially in the labour market, but also with respect to interest rates.

'Subdued economic activity and ongoing pressure on household budgets is likely to continue to exert a modest drag on housing market activity and house price growth this year, though borrowing costs are likely to remain low.

'Overall, we continue to expect house prices to rise by around 1 per cent over the course of 2018.'

Jack Ballantine, director of residential development and investment at UK Sotheby's International Realty, adds: 'We welcome the Bank of England’s small increase to interest rates today. 

'Sterling's value is now likely to increase, giving added confidence to foreign investors which is exactly what is needed following punitive tax changes and uncertainty around Brexit. 

'The move further solidifies London's economic stability and is unlikely to have a negative impact on house prices.'

Pound: Sterling had an immediate boost against the dollar - but is likely to be short-lived

What about credit cards and currency? 

The rate rise today is unlikely to make much of a difference to those about to purchase their holiday money.

It has led to a boost for the pound, but it is likely to be a long-lived.

Elsewhere, credit card holders could also be facing higher charges. 

Andrew Hagger of Moneycomms said: 'If you have a credit card with Barclaycard or Halifax your interest rate is linked to base rate, so higher rates will kick in straight away.'

He estimates that if all card providers were to raise rates by 0.25 per cent it would cost UK borrowers a combined &92.25million in extra interest charges per annum. 

What about investments?

Rising interest rates can be a good sign for investors in the sense that the backdrop to hikes is usually an economy doing well.

However, due to the dominance of big companies that do business overseas in the FTSE 100 a rise in rates can dent share prices. This is because rising rates lift sterling, which means that overseas earnings translate into less in pounds when companies report.

James Norton, senior investment planner at Vanguard, said: ‘Today’s increase in interest rates from 0.5 per cent to 0.75 per cent signals a growing confidence in the UK economy from the Bank of England.

‘Although uncertainty remains around Brexit, a rise in rates from the emergency low levels set after the global financial crisis means investors can start to benefit from rising yields. 

'We believe interest rates will continue to rise slowly and peak at lower levels than previous cycles, meaning that long-term investors should continue to benefit from a globally diversified portfolio of equities and bonds.’

The uncertainty over the rate rise highlights that investors should make sure their portfolios are not too focussed on the domestic market and should pay particular attention to companies’ balance sheets and prospects when investing.

Fund manager and smaller companies investor Paul Mumford, of Cavendish Asset Management, said that the move may turn out to be a bad one for the economy and UK-focussed companies.

He said: ‘The decision on balance might be the wrong one. While all agree that rates need to return to normality eventually, panicking and doing it for the sake of it - or just because other countries are doing it - will only make things worse.

‘The idea, as in these other regions, is to start incrementally escalating rates in a managed way as growth and inflation tick up. But the UK is in quite a distinct situation. To borrow some terminology from the Tories, the economy is stable, but far from strong - and certainly not booming.

‘Higher interest rates could have very disruptive effects on sectors such as housing, where it could trigger a rush to buy at fixed rates, and motors and retail, which are performing OK but contain a lot of highly geared companies.

‘This does not look like the sort of economy you want - or can afford - to remove demand from. Meanwhile the pound is holding firm at its lower base, so there is no immediate impetus to shore up the currency.

‘And of course looming behind all this is Brexit. Interest rates may be needed as a weapon to combat sudden inflation from tariffs should the worst happen and we crash out of Europe without a deal.

'It would make more sense to save the powder until there is more clarity on this front, and we now what sort of economic environment we're all heading into. The last thing we want is to be in a situation where we are stuck with higher and higher rates to combat inflation, while growth remains anaemic or stagnant.

‘These things are all swings and roundabouts, of course - one big plus from rate rises is that they will ease our mounting problem with big pension fund deficits. Whether this will make it worth the risk remains to be seen.’ 

Richard Stone, chief executive of The Share Centre, said: 'For investors, a rate increase might be expected to temper any rises in equities and an asset value as cash is a more attractive asset and borrowing costs increase impacting company profits for those with debt. 

'However, the experience in the US where rates have been increased six times in the last two years may give investors more reason to cheer as the Dow Jones Industrial Average Index has risen nearly 40 per cent over the same period. 

'This has been helped by strong growth and tax cuts but suggests that rising rates and a return to more normal economic conditions may actually be a positive for investors – not least in that they signal confirmation from the central bank as to the strength of the overall economy.'