The 0.5% Bank Rate has been at a record low since March 2009, but the cost of mortgages has been falling during that time.
The latest minutes of the Bank of England’s Monetary Policy Committee noted that lenders “did not expect mortgage interest rates to fall much further”. In fact, it said that banks’ funding costs, an important influence on mortgage rates, had risen since May and “it was possible that mortgage rates would shortly begin to rise”.
Mark Carney, the Bank of England governor, last week said that a rise in the Bank Rate was “drawing closer”.
The Money Advice Trust said this offered only a “short window” for people to organise their finances. More than a million mortgage holders have only ever owned a home when rates were falling or frozen at 0.5%.
Of course, the UK economy is performing far better than has been doing in recent years. With income growth finally outstripping inflation, consumer spending levels should be given a boost.
However, one of the problems we face is that inflation remains persistently low. Part of the reason for this has been cripplingly low oil prices, couple this with our strong currency and we’ve seen the cost of imports reduce. Because of this, The Bank of England is unlikely to raise interest rates imminently since it could push the UK into a prolonged period of deflation, which would be likely to hurt the economy to a greater extent than high levels of inflation.
Despite this, interest rate rises are coming. In 2016 they are likely to rise and, as history shows, things can change very quickly when it comes to the performance of an economy. Therefore, they may rise at a much faster pace than is currently expected – especially if the UK continues to perform so well economically.
As such, it seems logical to be prepared for interest rate rises and investors can do this through the types of assets that they choose to hold in 2016 and beyond.
Clearly, bonds are likely to become a less appealing asset, since their price moves inversely to interest rates. Similarly, for property investors the future may not be so profitable, since a rising interest rate may dampen demand for mortgages and cause the capital growth that has been a feature of recent years to come to an end.
For investors who hold considerable cash balances, higher interest rates are clearly welcome news. They should be passed on by lenders and allow savers to (at last) received a more appealing return on their investment. However, if inflation does pick-up (which the Bank of England is expecting to take place over the medium term) then the real return on cash could become negative.
What are your thoughts on the likely interest rate rise?