The Bank of England Monetary Policy Committee, chaired by Mark Carney, have voted unanimously to raise the base rate to 0.75%
The decision to raise rates was widely expected by financial markets, lifting the cost of borrowing above 0.5% for the first time since 2009. Since then, we have had 3 general elections, 3 million more people in employment and the FTSE 100 Index has more than doubled.
Warmer weather has definitely helped to boost the economy, after a slowdown in the first three months of the year and it is now expanding resiliently. The employment market also remains strong.
Interest Rates Increase And Investments
This interest rate rise has long been factored into financial markets and therefore it is unlikely to have a dramatic affect. Generally, higher interest rates make shares less attractive, but the difference between stocks yielding 3% to 4% and the returns available from cash or bond investments still remain wide.
From a currency perspective, normally rate rises would strengthen Sterling on the back of more international backing for the pound. Although this rate rise is unlikely to have a dramatic effect on the currency, if rates were to increase further, this could have a knock on effect on the value of overseas investments held in Sterling. The FTSE 100 Index would also likely to suffer as a result of a strengthening pound.
Since the Brexit verdict in June 2006, we have seen the FTSE 100 performing in this way. After an initial wobble, the FTSE 100 surged and the performance of the pound has been one of the strongest drivers. This is because such a large proportion of company profits of FTSE 100 companies are derived from overseas. If Sterling weakens, then overseas earnings, when converted back, are worth more, but on the back of further rate rises could we start to see the opposite?
While the impact of rate rises on financial markets is impossible to predict, it is fair to say that a market that has been used to low rates for almost a decade, may have some adjustment to make and we can expect to experience increased volatility going forward.
Overall, the base rate remains close to its lowest level in history and any further rate rises will be gradual and limited.
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Phil Terry
is a Partner & Independent Financial Adviser in our Wealth Management team.
Call 0800 024 1976 or contact us via the online form if you would like any advice in relation to the subjects discussed above.