Being asked to comment on a rise in interest rates is not something we have been asked to do for the best part of 10 years. It was perhaps inevitable though sooner or later. Looking back to the summer of 2015 the Governor of the Bank of England announced that an early rate rise was imminent. World affairs, economic performance and the EU referendum have, until now, played their part in deferring the rise.
The key driver for rate rise is controlling inflation which is currently running at nearly 3%, well above the Bank of England target rate of 2%. In the main, inflation has been fuelled by the weakening of the pound in light of Brexit. As a result we have seen a rise in the cost of imports, including consumer goods, raw materials and oil etc. Certainly the rise in inflation is not being attributed to an increase in wage demands or excessive consumer spending.
Given a more stable economy with sustainable lower rates of growth, it is hoped that such an increase will have the desired effect of lowering the rate of inflation. How then will the increased rate from 0.25% to 0.50% affect businesses and individuals alike?
Thoughts from our Partners
Streets Chairman and Managing Partner, Paul Tutin said:
“The rise in rates reflects the pressures on the UK economy caused by the weakness in sterling since the Brexit vote and the causal impact of rising import costs on goods and services. Supermarkets, for example, have held off for a long time in passing on increased costs to them caused by weakening of sterling (largely due to PR pressures) but they are now passing them on, hence inflation has been rising over the last few months. Overall the UK economy has been surprisingly resilient post referendum which has allowed the bank to move now to control inflationary pressures.”
Chris Hubbard, who specialises in small and owner managed businesses is concerned about the impact on business viability:
“Low interest rates for such a long period of time have enabled much business with perhaps poor levels of profit, but just enough to service borrowing to meet liabilities. Whilst this rise might be something they can still absorb, any future rate rise might put the viability of such businesses, so called ‘Zombie Companies’ at risk. In turn this could lead to an increase in business insolvencies, the obvious consequences of which would be unemployment and losses for lenders where the capital is unable to be repaid.”
Mark Poplett, a member of the firm’s tax team, has concerns for clients involved in residential lettings:
“Along with domestic borrowers, Landlords with variable or tracker buy-to-let mortgages could see a rise in their mortgage payments. The timing of which will be unwelcome given the recent restrictions to the tax relief available on mortgage interest.”
Tax Adviser Michael Ball hopes the rate rise will boost personal savings:
“If banks reflect the interest rate increase in their savings rates, this is likely to be a welcome move for a lot of pensioners who have had a sustained period of receiving very little on their savings.”
However Sam Tindale, Financial Adviser, gives a word of caution:
“Savers and investors alike need to remain vigilant about what proportion of their wealth they wish to hold in cash, since cash rates still sit far below the rate of inflation, which was 3% in October. Moreover, interest rates are only expected to rise very gradually over the coming two years, implying negative real returns should inflation not fall.”
Whilst it is still early days in the world of rate rises, it certainly seems that we should expect or prepare for future increases, even if they are only at a similar rate and introduced over a long period of time. The rate rise certainly should be a catalyst to thinking about ones attitude to borrowing, investment and financial management whether you are engaged in a business, an organisation or just concerned about your own circumstances. It seems the unprecedented period of sustained low, unchanged rates of interest has come to an end.